How much life assurance should I have?
Life Assurance may not be a priority for everyone. If you have no dependants and enough assets to cover your debts then it may not be necessary. Similarly, if you do have dependants and sufficient assets to provide for them after your death, you may not have a need for life assurance.
However, if you have dependants and are the primary provider and/or have significant debts that outweigh your assets, then it is likely that an investment in life assurance is something you should consider. The question that remains is simply, how much?
1. Where death would have a practical impact on the spouse’s ability to earn (ceasing work to care for children, or at least covering the cost of child care) then any reduction in earnings could be used to arrive at a lump sum using the formula outlined above. There may also be income, such as dividends, which would cease on death, which should also be included here.
2. This is a sum which, when invested, will provide an income and could be arrived at by taking the annual required income and dividing it by the percentage return that you believe is achievable or realistic to assume. For example:
It is appreciated that this is a very simplistic method of converting an income into a capital sum and takes no account of the life expectancy of the beneficiary(ies), inflation or the reasonable expectation of future increases in income. As a broad corrective approach the following methods could be adopted:
- Age of beneficiary: the older the beneficiary the higher the % return figure can be, possibly allowing for capital erosion.
- Inflation: where the life assured wishes to use a real rate of return, after inflation, the % return figure should be reduced by anticipated inflation rates.
- Rising earnings: where earnings are likely to increase, or the individual receives significant levels of non-cash employee benefits, a higher earnings figure can be used.
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