How to Determine if You Have Enough Life Insurance
If something happens to you and you are unable to provide for your family, will the amount of life cover that's paid out be enough to cover your outstanding debts and replace your lifetime income?
Many people in Australia do not have enough life insurance to look after their loved ones for more than one or two years if they were to die.
How much life insurance you need will vary, but you will want enough to protect your loved ones from financial hardship. Use the guide below to calculate how much life insurance will be enough at your current stage of life.
Make sure you're not underinsured and have too little cover, leaving your family unable to cover expenses or pay for your funeral.
The lump sum paid by your death benefit could assist with a variety of expenses, for example:
- Replacing your income when you pass away,
- Taking care of the funeral expenses,
- Paying the mortgage,
- Covering debts, and
- Providing for children’s education
If you already have life cover but have not reviewed or updated your policy recently, your family might be at risk. Significant life changes such as marriage, the birth of a child, and buying a home all impact your life insurance needs.
Not everyone needs life insurance. People with no dependents and lots of savings might not need personal protection or only require a small amount. Life insurance is usually only necessary if your loved ones would be left financially vulnerable in the event of your death.
6 Factors influencing how much life insurance you should buy
When calculating your insurance needs, you generally need to consider the following:
- The stage of life you’re in,
- Your current level of debt,
- Ongoing living expenses for your family,
- Funeral costs,
- Children’s educational expenses, and
- Medical bills.
There are various formulae and online life insurance calculators that can be used, and generally, they take into account your age, the age of your dependents and your current income, lifestyle and debts, including a mortgage.
You might find the below life insurance calculators useful:
- AAMI’s life insurance calculator
- Real Insurance life cover calculator
- Nobleoak’s death benefit calculator
- Lifewise insurance calculator
- AIA insurance needs calculator
- TAL’s cover calculator
Shop Around & Request Quotes
How do you determine how much life insurance you need?
The amount of personal insurance that's right for you might be too much or too little for someone else. For a quick calculation, take your outstanding debt and multiply that with your cash needs going forward. Then subtract the assets you have. This might give you a ballpark figure to work with. Although for a more accurate estimate, you might want to start your calculations with the stage of life you’re currently in:
If you’re young with no dependents, carefully consider whether a death benefit is needed. You might instead want to invest in TPD, trauma cover or income protection insurance. However, if you run a company or have outstanding debts, then some life cover might be beneficial. You don’t want to leave your parents or business partners with your debt.
When in a relationship and living together, you’ll need to consider the contribution your income makes to supporting your lifestyle as a couple. For example, if you earn significantly more than your spouse, it makes sense that you should purchase a more substantial lump sum amount.
Children are entirely dependent on you to provide for them, and it's usually during this time that it's also more challenging to save money. Term life cover is designed to provide your family with a death benefit to pay your debts and get your kids to adulthood. If you have young children, you at least want to leave your spouse with enough money to cover the cost of childcare and home maintenance.
When reaching the age of retirement, your need for life insurance usually fades as you've saved some money and your children have left the house and are now independent. Seniors can reduce the cost of their life cover premiums by lowering your level of cover to an amount reflecting your current situation.
Tips for helping you find the right amount of cover
- Assess your life insurance needs based on your current lifestyle and the plan for the next 5 years. Remember, you can generally upgrade and buy more term insurance later on.
- Decide on the type of cover you want; Death benefit, TPD, trauma cover and/or income protection insurance
- Select the number of years your family would need financial assistance and multiply your salary by that number. You can take the number of years left until your youngest child graduates high-school.
- Use life insurance calculators.
- Determine what you can afford. There’s no point in purchasing a policy, only to cancel it when you realise you can’t keep up with the payments.
- Consider your mortgage, loans and other debts (credit cards and car repayments).
- Estimate what your children might need, for example, the cost of university and whether you want to leave something behind when you pass away.
How much life insurance can I get?
There are usually limits on the maximum amount of life cover you can purchase. The lump sum benefit you can get generally depends on the life insurance company you choose, your policy type, your age and your income. Remember, the higher the cover amount the more medical questions the insurer will generally ask to ensure they are sufficiently protected against the risk of insurer you for such a huge lump sum. They might even request that you undergo a medical exam.
To find out if you are over- or underinsured or paying too much for coverage, shop and round and compare quotes from some of Australia's leading insurance providers. Sit down with a broker or your accountant to help you assess your financial needs and whether you have enough life insurance.
Compare Life Insurance Quotes Online
Get clarity about the pros and cons of buying life insurance directly from the insurer. Plus, a breakdown of ASIC’s 587 report & why you might need a broker
8 Tips for managing your life insurance premiums. Learn how premiums are calculated to help you find the right coverage & plan for possible future increases
You might be able to claim the whole life insurance lump sum benefit, when you’re diagnosed with a terminal illness and have less than 12 months to live.
We reveal the pros and cons of bundling life insurance, TPD and trauma cover into a single policy and how it can affect your lump sum payout when you claim.
Add low-cost life insurance benefits and features to your policy to potentially customise your life cover to better suit your specific circumstances.
Discover whether you should use a life insurance broker or buy directly from the insurer. We compare the pros and cons of both options to help you find the cover you want at a price you can afford. Feel confident and comfortable in your insurance purchase by first determine how you’ll buy.