FOOL SCHOOL
Assessing Whether You Need Life Insurance

August 12, 2002

Back in 500 BC there was a playwright called Aeschylus who many historians consider to be the father of Greek tragedies -- possibly because of the way he died. Apparently an eagle dropped a tortoise on his head.

It's true! According to legend, eagles used to pick up tortoises and attempt to crack them open by dropping them onto rocks. An eagle mistook Aeschylus' head for a rock (he was bald) and dropped it on him instead. (Stop laughing at the back.)

Unlikely as it may seem, consider this: if an eagle drops a tortoise on your head, will your family be left in dire financial straits?

Now, if you are single and don't have kids, dogs or a mortgage, then you should probably skip all this and go to our Health Insurance section to find out about policies to protect your income if you get very sick or disabled. This kind of insurance is way more useful to you if you can't rely on someone else to help with your living costs (forget the state; it doesn't love you -- and the thought of relying on benefits ought to keep you awake at night). Unless you want to be extremely generous to your Mum, sister or dog, then there's no point chucking money into a policy that only pays out after you are dead.

The rest of you, read on.

First, decide who is totally dependent on you for income. If you've got a fair bit of equity in it, you can always take a gamble that property prices will remain high enough that your family could sell the property and pay off the loan -- in which case you don't need life insurance.

But if people are dependent on you, decide how much of a lump sum would be needed to pay off the mortgage and how many years' worth of your annual income they will need to keep them financially comfortable for as long as necessary. Perhaps you've got children who will need to be seen through school and university, or a partner who can't take your place as the breadwinner.

So, how much life insurance do you need? Well, if we listened to insurance companies, we'd all be paying out for life insurance worth up to 15 times our annual income. So a person earning £20,000 would end up buying £300,000 worth of cover. Don't use their calculations -- work out how much your own family actually needs. Although there is a strong temptation to turn your untimely death into a Lottery win for your spouse and kids, there are good reasons not to do this. It's expensive, unnecessary and you will feel uncomfortable being worth hundreds of thousands of pounds as a corpse, but not much as a living person.

The best way is to multiply your income by the total number of years you think your family will need support and ...Bingo. You have a DIY formula for life insurance.

The basic rule about buying life insurance is to go for the cheapest deal. All the companies are offering exactly the same thing, so there's no reason to pay over the odds.

> Get a quote in the Fool's new Insurance Centre