How Necessary is Life Insurance?
A friend of mine called yesterday with the exciting news that his wife had given birth to a bouncing baby boy last week. He asked me if I had any constructive advice for him. I suggested that he should consider buying a life insurance policy for his new son.
He didn’t exactly jump at the idea. Many of us scorn the idea of insurance. After all, when you hear about the problems people have making claims and the cost of the premiums; it can make you wonder if it's worth it. And for some types of insurance that's certainly an arguable point. Take pet insurance, for instance. Some people choose to self-insure their pets, meaning that they put a small sum each month into a high interest savings account rather than fork out £100+ per year for pet insurance.
The hope is clearly that the pet will manage to get by with little more than his inoculations for the duration of his life - and if not, you'll have a pot of cash to draw on, which will remain yours if all goes well. There are risks involved - veterinary fees for a broken leg or medical condition can be shockingly high and could end up costing you a pretty sum on top of what you'd saved. But many of us still think that's a gamble worth taking.
What about life insurance? Well the first thing to consider is whether or not you need it. After all, the purpose of life cover is to pay off your debts and provide your family with some level of income, should you die. If you have no one relying on you financially why would you need it? Why not save your cash and look into other types of cover, such as income protection insurance, instead?
But for parents with young children, such as my friend, life insurance can be seen as vital to protect your loved ones should something happen to you. So how much cover do you need? This can be complicated to work out - while you don't want to pay for unnecessary cover you don't want to risk being underinsured either. Consider what your debts add up to - do you have a mortgage, personal loans, credit card balances? Try plugging them, as well as your monthly outgoings into a life insurance calculator - it should give you a feel for the amount of cover you need. It's often quoted that roughly twelve times your gross income should give your family a decent standard of living - but this will obviously vary from household to household.