Who needs life insurance?

We don't need as much life insurance as life insurers would like to sell us! Here's how to figure out whether you need it and how much you need.

You don't want to buy insurance you don't need. To avoid buying life insurance you don't need, ask yourself a simple question:

If I die, will my family or loved ones miss my income or financial support?

That's the key question for most of us. If you can't think of anyone that you care about who depends on you financially or for other support (e.g. in the home), life insurance isn't for you.

To take an example: there's no need to pay for life insurance to pay off your mortgage when there's nobody who would benefit except your bank. We all have lots of other bills to face and our retirements to pay for, so let's not waste money on insurance that helps just our banks and insurance brokers.

The majority of people who need life insurance are parents of children who still require financial support. I mean both parents usually need it, because they both carry out a support role that would cost money to replace. If your partner earns an income, that income will need replacing, should the worst happen. If your partner doesn't earn an income but looks after the children full-time, you'll probably still want to insure your partner, because it's not cheap to hire a full-time nanny.

And it's not just children. It may be that you support others financially, such as a sibling or a parent. Similarly, your partner might partially or wholly rely on your income. Those people will need protecting. It's just a case of thinking who will be affected.

You can reverse that question, too: 'Do I depend on anyone else?' If the answer is 'Yes' and that person doesn't have life insurance to help you, you can take out life insurance on that person's life.

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How much do you need?

I've heard of many rough guidelines to the amount of insurance you need. Some say that your life is worth about about ten times your annual income if you're the sole breadwinner. Others say that you're worth £20,000-£25,000 per year if you look after the children full-time. However, we're all different, as are our requirements.

If your partner has an income, you might not require so much insurance, for example. Do a few calculations based on what your dependants will need if you die tomorrow, including not just monthly house bills but also such things as future university costs for the children and pension contributions for your partner.

The payout is tax-free, but you may want some extra cover to pay off debts, because debts are paid from your estate before your benefactors get what's left.

Even after you have bought life insurance, you will need to re-consider the total amount of cover as circumstances change. You may need to increase the insurance if you get a bigger home or have more children, or if higher inflation devalues your insurance. On the other hand, as your children get older and the mortgage shrinks, your family will need less financial support and for a shorter period of time, so you could reduce the cover.

One of the easiest ways to work out how much you need is to figure out how much you owe on your mortgage, if you have one. Take out enough cover to ensure the mortgage can be paid off immediately upon your death, and you'll ensure your loved ones always have a roof over their heads.

Get the best deal on your life insurance with lovemoney.com

How long to insure yourself for?

This should be relatively easy to decide. You need to be covered for as long as people will be depending on you. This could be 18 years for children or, if you support your partner, it could be till you are due to retire. Again, if you're covering your mortgage, you need to take out life insurance for the full mortgage term.

Get the best deal on your life insurance with lovemoney.com

More on life insurance:

Women paying 20% more for life insurance

The insurance most of us should resolve to have in 2014

How to get the best life insurance policy