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How To Use Life Cover Effectively.

Feb 22, 2008
Everyone at some point realises that they do need some sort of life cover but very few actually know what type or indeed how much they actually need. This article aims to clear that up and help to ensure that you have the right cover for your financial situation and the right amount of cover for your particular needs.

The reason for the need of life cover is to be able to meet the financial demands you may leave to someone in the event of your death. This could take the form of a mortgage or an outstanding loan that was acquired for the car or that family holiday you decided on. It could also be that yours was the largest or sole form of income into the household. The fact is that the loss of yourself will mean the loss of a large, if not the total, amount of income coming into the household.

So let's start at the beginning. Do you have a mortgage or loan outstanding and do you have them insured? If you do, and if they are as yet not insured, assess what the amount of that loan or mortgage is. Whatever the value of the mortgage or loan is the amount of insurance you therefore need to protect against loss of earnings after death. If, after you have allowed for that cover, you can also afford critical illness cover, this would be an advisable route to take as well.

The second thing is slightly more complicated. That is to work out what you would need if you are just protecting your dependents or family in the event of your death or critical illness and they stand to lose your income.

It pays to consider the type of impact your loss would have on your family financially. Say that at the time of your death you were earning 25000 each year. That would mean that your family would be worse off by that amount each year thereafter. You would need to ensure that you had a policy that would cover this loss in one way or another.

There are several ways to achieve this outcome. The policy can be arranged to pay out either monthly or annually for the amount required. So a policy that pays out 30,000 per annum would be an option for a family that is going to be 30,000 worse off every year in the event of your death and loss of your salary.

Another alternative solution to providing an income on death, but at this point it has to said is a complicated solution, is to provide a lump sum death benefit. Most people are aware that if they are given a lump sum they can in turn invest that sum of money to provide an income. It is this knowledge that makes this solution work quite well. What you do is take out a lump sum life insurance for significantly more that the required amount, in this case 20,000. Significantly more than this would be considered 10 times which would give a benefit amount of 200,000.

When the insured person then dies, the family will receive a payout of 300,000 which is theirs to invest. By investing correctly, this amount should then produce an annual income of 30,000 for the family members left behind. This effectively replaces the income of the family breadwinner.

Therefore, to conclude, obtaining life cover is one of the most important decisions you will make concerning your family and its future financial security. But once you know what the cover is for and how much you will need from the policy then the rest of the process should be quite simple. And remember that reputable life insurance companies deal with these policies daily to suit a spectrum of different personal needs. A call to them will be all it will require to obtain the ideal policy tailor made for your situation.
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