How much life insurance do I need? Putting a price on your life is no easy task, and the reality is that the right amount of life insurance varies depending on your personal circumstances and the state of your finances.
To work out the correct amount of cover you need, you will have to calculate how much money your family would need in order to maintain their current standard of living if you were no longer around. A simple way is to make a checklist of what you need covered:
A good idea is to also consider what assets you have that you or your family could turn into cash. This will help you avoid over insuring.
It is ironic that most people won’t have any second thoughts about getting insurance for their cars, homes and health but overlook things like protecting their families and their incomes in the event of illness, disability or sudden death.
Below is a list of the important types of life insurance you may want to consider:
Life insurance protects your family from financial stress in the event of your death.
Income protection gives you coverage when you are unable to work due to severe illness or extreme physical injury. Regardless of whether you are single, it is wise to have some money to depend on if something unfortunate happens. Income protection can help you cope financially because it pays you up to 75% of your income. It covers you until you are ready to re-enter the workforce or until retirement age in cases where there is total disability.
Critical illness insurance helps ease the financial stress and burden brought about by a serious illness by paying you a tax-free lump sum. This insurance covers you from the time you are diagnosed with a critical illness until you have fully recuperated. Although not all types of illnesses are covered, it does cover the most common terminal illnesses such as cancer, kidney failure, major organ transplant and multiple sclerosis. Critical illness insurance is important because it can boost your finances in times of emotional and financial hardship.
Total permanent disability insurance acts as a safety net in the event of an accident which results in total disability. It also pays you a lump sum to replace any lost income because of your inability to work due to the permanent disability. You should not confuse this with income protection because TPD pays only when you are completely disabled.
| Response | 75+ yrs | 65-74 yrs | 55-64 yrs | 45-54 yrs | 35-44 yrs | 25-34 yrs | 18-24 yrs |
|---|---|---|---|---|---|---|---|
| None of the above | 82.76% | 74.86% | 66.28% | 51.81% | 32.99% | 27.98% | 17.53% |
| Buying a home | 8.62% | 10.29% | 9.88% | 16.58% | 21.32% | 22.48% | 29.9% |
| Retirement | 8.62% | 11.43% | 18.02% | 21.76% | 24.37% | 19.72% | 27.84% |
| Getting married | 6.9% | 10.86% | 6.98% | 11.4% | 16.75% | 26.15% | 36.08% |
| Having a baby | 5.17% | 10.86% | 11.63% | 21.76% | 39.09% | 43.12% | 51.55% |
| Moving home | 3.45% | 1.14% | 2.33% | 2.07% | 5.08% | 7.8% | 12.37% |
| Starting university education | 1.72% | 0.57% | 0.58% | 2.07% | 3.05% | 2.75% | 8.25% |
| Your children moving out of home | 1.72% | 2.29% | 4.07% | 6.74% | 4.57% | 5.96% | 15.46% |
| Buying a car | 2.29% | 2.33% | 2.59% | 5.08% | 6.88% | 13.4% | |
| Starting a new job | 1.14% | 1.74% | 6.22% | 8.12% | 15.14% | 22.68% |
When shopping around for the perfect policy, you will come across a number of insurance terms you might not be familiar with. This unfamiliarity could lead to you getting the incorrect policy for you and your family.
In order to purchase the right policy, you should know which type of insurance premium you want. There are three kinds of premiums:
A stepped premium may seem to have the advantage because it is much cheaper, but if you think about insurance on a long-term basis, you will see the wisdom of having a level premium.
Learn more about how stepped and level premiums work
Maximum Sum Insured
The amount of life cover you can take out will be dependent on both your situation and the policy you decide to go with. Many life insurance policies will offer a maximum-sum insured on policies, which can be adjusted depending on your age, your occupation and other personal features. Other policies will enable you to take out as much cover as you desire.
Maximum Cover for Additional Benefits
Additional benefits will often have a maximum benefit amount that is applied. For example, the Zurich Protection Plus - Death Cover plan will provide your family with funeral expenses up to a maximum of $15,000.
Maximum Sum Insured for TPD
Life insurance underwriters will closely consider the amount of cover you apply for in a TPD plan to insure the amount does not surpass what you would be entitled to if you had remained working. Life insurance companies do not want to make payments that result in you “milking” the system by making more than you would if you were to continue working.
Maximum Sum Insured for Trauma
Similar to TPD, you will need to explain your reasoning behind taking out a high amount of trauma insurance cover. It is not enough that you can afford the premiums. You must show why your situation requires such a substantial benefit payment. Most policies will only offer up to $2 million in cover.
What could impact the amount of cover that I can take out?
Despite knowing the benefits that life insurance can bring, people still procrastinate when it comes to getting insurance. Two of the most common reasons why people don’t buy insurance are that it is too expensive and that it is too complicated to understand.
Furthermore, there are a lot of myths regarding life insurance. To separate fact from fiction, it is best to look into these myths closely.
Approximately 95% of Australians with dependent children do not have sufficient life cover in place. Many people will rely on the default level of cover provided in their superannuation but fail to determine how much their family would actually need in the event of their death. It is critical for all Australians to closely consider how much cover they have in place and to have a clear understanding of what their family would need following their death.
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