How much Life Cover do I need?
This is probably the most common question financial advisers get asked and I dare say it is probably the question that is answered most poorly in our industry. Most advisers have a stock answer of somewhere between 4, 6, 8 or 10 times your salary when they are asked this question.
The truth is unless you have an in-depth knowledge of an individual’s current financial situation, their family/dependants and their lifestyle and financial goals you should not be advising someone on the levels of life cover they should have.
There are a number of highly effective methods that can be used when calculating the amount of cover someone needs and these are examined in more detail below.
- The Dependant Method
This is the very first question any financial planner should ask you, do you have financial dependants? If the answer is “no”, then you don’t need life cover!
Even married couples may not be financially dependent on each other if they are both working and the mortgage would be cleared on death.
- The Human Capital Method
This method is a simple mathematical equation, we can calculate the present value of every after-tax Euro you would earn between now and when you would retire and we simply insure that amount.
This is probably the most accurate way of calculating how much your family would lose if you died, but it can make things quite expensive as it doesn’t take into account other sources of income that may be payable in retirement or your families reduced costs as your mortgage for example would be cleared.
- The Expenses Method
This method quantifies your family’s current annual expenses and then puts enough cover in place for this amount until you retire.
Although this is a good method for calculating life cover, it doesn’t take into account other sources of income which can be used to fund your family’s lifestyle.
- The Metis Ireland Method
At Metis Ireland, we use a mixture of all three methods.
- We will calculate your current net annual earned income
- We then account for the state widowers pension which would pay your family €10,062 per annum if you die, or any other income you have e.g. rental income.
- Next, we reduce this by the value of your annual mortgage repayments which are to be cleared on death.
This gives us an annual income figure that your family will need to fund their lifestyle until retirement without over/under insuring you as the 2nd and 3rd method tend to do.
Head of Operations and Financial Planning
Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.
All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified independent financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts