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Buying life insurance can be a bit of a mine field. However hopefully having read this article you should find the whole process that little bit easier and as such be able to find the right product that suits you and your own personal circumstances.

Buying any financial product is always going to be a bit tricky there are many things to think about such as what you need the product for, value for money, suitability of a particular company and so on. With life insurance it can be a little simpler as all you really need to know is how much do you need and how long do you need it for. Once you have established these two facts all you need to do is find a suitable company at the right price for your own budget.

So how much do you need? This depends very much on what you actually want the cover for. Let’s say for example you want to cover a mortgage of 100,000 then it is simple to say that you need 100,000 in cover and then your dependents should be able to pay of the debt should you die.

If family protection is the kind of insurance you need then working out the cover required is slightly more complicated. You need an insurance policy just to protect your family, therefore you need to establish how much worse off your family would be on your death.

The easiest way to assess this is to look at what you earn per year. If you earn 35,000 per year then the straightforward calculation would be that your family will lose out on 35,000 per year when you die. You therefore will need to take out 35,000 per annum in protection.

There are two options in this case. The first option comes under the name of family income benefit. This policy guarantees a specified amount of money to be paid out on an annual basis for a set timeframe. Based on a salary of 35,000, a policy taken out to cover this amount paid over 25 years would guarantee a payout of 35,000 per annum for a period of 25 years.

Indexation can also be included in this type of policy. Essentially, the way indexation works is to increase the return on your policy each year in accordance with the average earnings index. In other words, your family will benefit from what your pay rise would have been had you still been alive.

The second option open to you is a lump sum life insurance plan. The difficulty posed with this type of policy is that you have to calculate how much of a lump sum you need to in order to guarantee your predetermined 35,000 payout per annum. This can prove problematic as you cannot predict how your money will be invested, nor can you know how much return it will give in the future. Therefore, with 35,000 being subtracted from an unknown amount every year, you cannot know how long it will last. The widely taken guideline is that you must factor in a minimum of 10 times the required amount, that is to say that 35,000 per annum requires a lump life insurance sum of 350,000.

The most financially secure choice between these two approaches is obviously the family income benefit plan. Your family will receive the same amount of money from this policy just as if you were still receiving an income had you been alive, and without the variables of investment fluctuations. With it you will know exactly what your dependants will receive each year.

So in summary cover needs to be sufficient to meet the needs that you have laid down and it needs to be for the right amount of time that is right sum assured and the right term. A lot of internet based web sites have loads of information designed to make this whole process easier so don’t forget do your research and if you are still unsure ring them and ask to speak to one of their advisers.

Last 5 posts by Chris Clare

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• Getting a mortgage in the credit crunch - April 13th, 2008
• Whole of life insurance. Its uses. - April 13th, 2008

Tags: Life Insurance