If you ask most life insurance companies they will recommend that you speak to a financial adviser, as very rarely these days are the companies’ representatives authorised to give you advice. So how do you work out how much cover you need?

You need to ask yourself a key question or let a qualified adviser such as myself work it out for you.

1. What is the cover for?

If it is to cover the cost of a funeral or pay an inheritance tax bill then you don't need life insurance you need life assurance, the difference is more than just a two letters. An assurance product has an investment value that accumulates and the plan stays in place until the inevitable happens. An insurance policy in contrast rarely has any investment element and usually has an end date, it's sometimes referred to as "term assurance" but the stricter definition is insurance.

Knowing why you need the cover is the key to calculating the level of cover you will need, as it will help you answer the other questions that we wont cover in this article, questions such as how long will you need the cover for? Should the cover be linked to inflation, or earning or another index? Should the value of the cover decrease over time? Should the insurance pay out as a lump sum or as regular instalments? Do we need a joint or single life policy? You get the picture you really need to know what the cover is for to arrange a plan.

Methods of calculating cover.

Financial Advisers have many ways of calculating the amount of cover that you need depending on the reason for the cover. If you just want to cover your debts then an adviser would look at the terms of the debts and set up a plan that ensures the value of the cover reduces each year at the same rate as your debts. Most people I see have this in place for their mortgage, but have you thought about your other debts?

After debts are paid most people want to protect the standard of living of the ones they leave behind. In my experience this is where you find the protection shortage really is. Here advisers differ many will advise that you need lump sum cover that can be invested by your loved ones with the hope of receiving a certain interest rate and that by living off the interest and using some of the capital a good standard of living can be maintained without your salary.. Calculators dotted around the Internet, work on this premise but they are in my opinion not really that useful, they make too many assumptions and rarely do they explain them. They just pop up a message saying you need a certain amount cover and ask you to click through to buy it.

Alternatively you can work out the income shortfall that your loved ones are likely to have and arrange a plan that will pay them that amount on a regular basis, this basis or arranging insurance however leaves very little flexibility for those left behind.

Life insurance is often treated as the poor relation of financial products bought and sold via leaflets in the daily paper without any advice. The industry has often viewed it as a simple product that the public can arrange for themselves, but it's my assertion that this is often an area in which highly intelligent people require guidance it isn't as simple as insurers would like to make it seem. I would recommend that everyone take regular stock of their life insurance provision, and get qualified advice if not from me from another independent financial adviser.

If you would like to talk about any of the issues raised in this article or any financial matter please feel free to give me a call on 0191 4066453 or drop me an email by clicking here.