Risk Insurance

Just how much life insurance do you need?

13 March 2019
4 min read

Unfortunately and all too often, individuals will fail to consider the importance of life insurance until it’s simply too late – and we can understand why. Life insurance typically isn’t a topic of conversation openly spoken about at the dinner table. It can be a bleak subject that forces families to consider the possibility of life after the loss of a loved one – and how can you put a price on the life of someone you love?

But life insurance shouldn’t be seen as “how much one’s life is worth” rather “how can I ensure my family is supported and protected when I’m gone”.

As such, when determining how much coverage you may need, it’s important to begin by reviewing and analysing your current and future financial situation.

Don’t be fooled by online advice

Generally, a loose industry concept which gets thrown around online, is that one’s life insurance should follow the ‘10 times income’ rule. This simply suggests that you should have coverage that equates to 10 times your annual income.

A potential flaw of the ‘10 times income’ rule is that it may not take a detailed look at your family’s needs; or take into account your savings or existing life insurance policies. Also potentially , coverage for those who stay home and care for loved ones, sick family members or young children.

Another online tool commonly used to determine your life insurance level is a life insurance calculator. While these can provide a rough guide, they can sometimes be inaccurate and should not solely guide you when you decide what policy to take out.

So how do you determine the right amount of life insurance for you? Let’s take a look at four important areas which will help to determine your required level of cover.

Determine who you want to protect

It’s critical to identify who you want to receive your life insurance payment, if the unfortunate was to occur. Typically, beneficiaries are dependents, such as a partner or child. Depending on your situation, this may also include a family member or close friend.

Once you’ve made a list of your beneficiaries and those you wish to protect, you need to begin to ask yourself what their needs are and how you can help meet them. It’s also imperative to consider their future needs, for example – a child requiring funding for school or tertiary education, or a sick family member who may need financial support.

What are your monthly living expenses?

It may seem obvious, but accurately determining your monthly living expenses can often be an area that’s commonly miscalculated. An accurate estimation of your monthly living expenses is critical in ensuring those who are financially dependent will be appropriately covered. As such, it can be of significant value to create a monthly spending budget.

What are your current basic expenses?

These might include (but not limited to):

  • Food such as weekly groceries or the cost of eating out

  • Bills, including household and individual

  • Taxes such as rates and income tax

  • School fees and extracurricular activities.

Do you have any additional assets?

One way to potentially reduce your cover requirements is with additional assets. This will also potentially provide your identified dependants with an additional income source if you were unable to support them.

Assets may include (but not limited to):

  • Income from investments such as shares

  • Income from investment properties

  • Savings.

Do you have any liabilities?

Your liabilities will also affect your level of cover. It’s important when negotiating your life insurance policy to factor in cover large enough to support your dependants and any liabilities they may inherit.

These may include (but not limited to):

  • Mortgage or rental payments

  • Education costs

  • Outstanding loans – personal, investment or business

  • Credit card debts.

It’s also important to consider future expenses. For example, do you and your partner plan on buying a house in the near future, helping your children through schooling, or supporting them in the purchase of their own home?

Revisit your policy

It is critical you consider reviewing your insurance policy regularly as your life situation changes and evolves.

Navigating the insurance landscape can be a difficult task. The best way to gather an accurate assessment of your life insurance policy is by speaking to a specialist. Our friendly and experienced insurance team will be happy to help you and ensure you and your family are appropriately protected.