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Your life insurance needs can change significantly as you reach your 50s, 60s and beyond, making it tricky to work out exactly how much cover you need.
You might, for example, have fewer financial commitments than you did when you were younger, but you could still have a mortgage or other debts, dependents or other costs you’d want to make sure are covered if you die.
So, if you’re considering life insurance after 50, how much cover might you need and what should you take into account when working out the right amount? Here are some things to consider
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If you’re looking for life insurance advice, tell Unbiased about your needs and they will match you with a protection adviser who can help you review your cover. Many matched advisers offer a free initial consultation.
Unbiased Group Services Limited is an Appointed Representative of Richdale Brokers & Financial Services Ltd, authorised and regulated by the Financial Conduct Authority (FCA). Our appointment is limited to effecting introductions for regulated mortgages, insurance and investments (excluding pensions). Any regulated financial advice is provided by the adviser or firm to whom you are introduced. Financial advisers may offer independent or restricted advice. Mortgage brokers may operate on a whole-of-market or limited-panel basis. We may receive a fee, commission or other commercial benefit in connection with introductions and resulting business.
Working out the right amount of cover for you
A good starting point when working out how much life cover you may need is to think about the reasons you might want life cover in the first place.
For example, is it so that your family could cover mortgage payments if they no longer have your income to rely on, or so they would have a lump sum available to help with everyday living expenses?
Below we highlight some of the main reasons the over-50s take out life cover and in each case, how to calculate how much cover may be required.
Life cover to pay off a mortgage or other debts
If you’re taking out cover specifically to clear a mortgage, credit card or loan, in the event of your death, then you’ll want to consider cover for the total amount owed. Most people buying life cover to clear a mortgage opt for decreasing life cover, which means the level of cover you have reduces in line with the mortgage, and the policy finishes when your mortgage term is up.
In this case, it’s relatively straightforward to work out the level of cover you may need, as it simply matches your mortgage amount, with a policy term that matches the mortgage term.
Cover for living costs
If you’re buying life insurance so that your family’s living expenses would be covered in the event of your death, working out how much cover you may need isn’t quite so straightforward.
You’ll need to start by sitting down with your bank statements so you can tot up your monthly living expenses and then how much these will add up to over a year.
A simple calculation might be to multiply your annual living expenses by the number of years you want to cover. You can then deduct any existing assets or savings to give you the amount of life cover you need.
For example, if your family needs £30,000 a year to cover essential living costs and you want the policy to provide support for 10 years, the total level of cover you’d need would be £300,000 (£30,000 × 10).
If you already have, for example, £100,000 in savings that could be used towards those costs, you might be able to reduce this to £200,000 of cover.
If you’re pretty certain your family’s living expenses will remain at £30,000 a year, then you’d usually opt for level term insurance rather than decreasing cover. Level cover means that your payout is fixed at £300,000 throughout the policy term, rather than this figure reducing over time.
Cover for an inheritance tax bill
If the main purpose of taking out life insurance is to provide money to pay an Inheritance Tax (IHT) bill, the calculation is slightly different.
A basic approach is to work out your estimated IHT bill, and then deduct any money you might have already available to pay it, and this should give you the amount of life cover needed.
For example, if your estate is expected to face a £200,000 IHT bill, and you have £50,000 in cash or other readily available assets that could be used to pay it, you’d need £150,000 of life cover (£200,000 − £50,000).
Whole-of-life cover, which covers you for as long as you live, is generally used where the objective is to cover an IHT liability whenever death occurs. This is different from term life insurance, which only pays if you die during the policy term, and whole-of-life is typically more expensive too as a payout is guaranteed.
Bear in mind that if the policy is intended specifically to pay an IHT bill, it will usually need to be written in trust. This means the payout can sit outside your estate for IHT purposes and be made available to your beneficiaries to help meet the tax bill. However, it’s worth considering professional advice before setting up a trust, as it needs to be structured correctly and there can be tax implications if you retain certain rights or control over the policy.
You also need to think about whether the IHT liability could change over time. For example, the value of the estate may rise, tax allowances may change, or debts and gifts may affect the eventual bill. This means you might want to leave some headroom rather than buying cover for exactly the current estimated liability.
Looking for life insurance advice?
Retiring or downsizing? A protection adviser can help you review your cover. Matching with a protection adviser is completely free. Many matched advisers offer a free initial consultation.
Unbiased Group Services Limited is an Appointed Representative of Richdale Brokers & Financial Services Ltd, authorised and regulated by the Financial Conduct Authority (FCA). Our appointment is limited to effecting introductions for regulated mortgages, insurance and investments (excluding pensions). Any regulated financial advice is provided by the adviser or firm to whom you are introduced. Financial advisers may offer independent or restricted advice. Mortgage brokers may operate on a whole-of-market or limited-panel basis. We may receive a fee, commission or other commercial benefit in connection with introductions and resulting business.
Some common mistakes when buying life insurance
If you’re over 50 and planning to buy life insurance, don’t leave it too late. Life insurance premiums generally increase with age, so taking out cover earlier can mean lower premiums.
It’s also important to consider whether you have any existing life insurance through an employer. If you do, this could reduce the amount of additional cover needed.
If you have any medical conditions, make sure you mention them when asked. Failing to disclose health issues you have now or have had in the past, or saying that you don’t smoke when you do, could cause problems if your family needs to make a claim.
Don’t assume you can do without life insurance simply because you’re not currently earning. If you’ve taken a career break to look after children, for example, your death could leave your partner facing significant additional costs, such as childcare. A life insurance payout could help cover these expenses and provide financial support for your family.
It’s also worth giving inflation some consideration too. For example, if you take out £150,000 of level cover today, this £150,000 won’t have the same spending power in 10 or 20 years once inflation is factored in.
You might therefore want to consider inflation-linked or increasing cover, which means the amount of cover you have goes up over time, although this can mean premiums rise too.
Finally, don’t confuse life insurance with over-50s life insurance. The latter is typically a type of guaranteed acceptance whole-of-life policy aimed at covering funeral costs and typically offers a much lower level of cover.
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If you’re looking for life insurance advice, tell Unbiased about your needs and they will match you with a protection adviser who can help you review your cover. Many matched advisers offer a free initial consultation.
Unbiased Group Services Limited is an Appointed Representative of Richdale Brokers & Financial Services Ltd, authorised and regulated by the Financial Conduct Authority (FCA). Our appointment is limited to effecting introductions for regulated mortgages, insurance and investments (excluding pensions). Any regulated financial advice is provided by the adviser or firm to whom you are introduced. Financial advisers may offer independent or restricted advice. Mortgage brokers may operate on a whole-of-market or limited-panel basis. We may receive a fee, commission or other commercial benefit in connection with introductions and resulting business.