How much life insurance cover do I need?

This question has always intrigued me because it sounds similar to the equally difficult-to-answer question, ‘how long is a piece of string?’

I suppose the answer is, ‘as long as it needs to be and as much as you need to have’.

But that's probably not going to move the answer along much, so here is a good place to start your thinking.

Jump Ahead

Start with this question

Do you need to just cover the mortgage debt, or to be able to continue to pay the rent or do you need enough insurance for a partner and family to be able to continue to enjoy life and move ahead?

Part of the difficulty in answering this question is that nobody (other than a specialist risk adviser like Unusual Risks Insured) likes to talk about something that we hope never happens.

And that's exactly why people use the specialist risk advisers at Unusual Risks Insured to help them start their thinking about what matters most.

The simple idea behind life insurance

Life insurance is designed to provide peace of mind so that the people you love will be able to financially cope if something happens to you and you're no longer around to make your contribution to their lives.

• Over the course of your working life, you'll probably earn a small fortune (and spend a small fortune) so there is a significant financial loss to your family (current or future) if you unexpectedly pass away - life insurance is designed to compensate for this loss.

Here are some helpful tips for thinking more about the questions ‘How much is enough for my situation?

Pro tip: most people don't know life insurance policy will also pay out in advance for a Terminal Illness and that 30% of all life insurance claims are for terminal illness.

Start your thinking

A good place to start is to get a realistic picture of what you want your current (or future) family life to be like if you're no longer around?

• Do you want to face a terminal illness with the ability to extinguish all debts and still have money left to make treatment decisions?
• Do you want your current (or future) family to face financial uncertainty or financial security?
• Do you have a partner and are they an income earner, homemaker or both?
• Do you have children in your life and do you want them to have the opportunity to go to private or public schools?
• Who are the people in your life who might now (or in the future) depend upon your financial capacity?

When working with clients, I often suggest a simple way of looking at this is, ‘Let's agree that the first person to go to heaven should take all the debts with them too’.

Think about an amount of life insurance that will do more than just cover the basics. 

Get to know your own numbers

To get started you need to know the following information about your open financial situation.

• What does it cost you to live each week now (and in the future)
  • food, fun, rent, car or mortgage payments?
• Who relies on you financially now (or in the future?)
  • partner, kids, elderly parents, perhaps a special needs sibling, a friend or a business?
• What are the costs of your future plans?
  • Have somewhere nice to live mortgage-free
  • Perhaps for your future partner to be able to live off the interest from significant investments?
  • Be able for your partner not to have to work? (or not work as hard)
  • Be able to put your kids (or nephews or nieces) through good quality education?

Watch our fun explainer video How Much Life Insurance is Enough.

It's your life, so think bigger about it and its potential

At the end of the day, take a forward-thinking view of what you’d like life to be like:

• for you if you suddenly find yourself managing a terminal illness, a long-term disability or,
• for others if you unexpectedly pass away and leave a legacy of value for someone you love.

Life is for the living so think about covering more than just your current debts.

The emotional cost of big changes

Let's be honest, most big changes have both emotional and financial costs associated with them - making it hard to predict how we’ll manage both.

• The problem with change is we all usually overestimate how well we'll react to it and underestimate how well we will afford to pay for it.

Anyone restoring a car, renovating a house or using IVF or Surrogacy (or raising teenagers) will attest to that.

How do you want life to look like if you're not around to share it?

Do you want your partner to be able to purchase a nice place to live or need to continue to pay rent for the rest of their life? Do you want the kids to be forced to move schools and move away from the currently supportive community or to be able to finish their education in the place that is best for them?

Pro Tip: High-income earning partners are often able to afford a larger-than-life mortgage and matching lifestyle together, but would struggle if they had to fund that alone. Don't forget the value of protecting your homemaker.

What does a Minimum Amount look like?

Home Cost + 1 Year Income

We say the bare minimum is at least being able to pay out the mortgage debt (or if you're renting to buy a nice place to live), and provide at least a year's worth of income to help with the emotional and financial changes.

For example: If your mortgage debt is $700,000 and your income is $100,000 make sure the absolute minimum life insurance covers the mortgage debt and at least a year's income.

Many people who dismiss life insurance as a ‘grudge purchase,’ find it hard to look past just paying off their debts. The emotional cost of unexpectantly losing someone significant in their life probably means the surviving partner ‘doesn't want to be forced to return to work the day after the funeral’ just to continue to make ends meet.

When it comes to thinking about ‘how much life insurance do I need’, make sure you provide for more than just your debts.

The issue is not that you can't afford it, it's that you don't believe that it could ever happen to you.Drew Browne

What does a Maximum Amount look like?

How much living do you have to do?

You might choose to just cover the basics but there's also the option of providing an ongoing income stream so whoever you unexpectedly might leave behind can still go on holidays, still help the children (or nephews or nieces) buy their first car, or pay for their wedding, help with a deposit for a house or just help someone finished higher education without having a government HECS-HELP debt to pay off.

Think about the standard of living you want your family to live

The one constant in a busy life is the need for Wi-Fi, and constant change. That's why having an ongoing relationship with a professional advisor means you can update your insurance policy as your needs and opportunities change.

When you need to answer that nagging question, 'How much life insurance cover do I need?' remember life is for the living and those we love today, and ultimately tomorrow.

So think carefully about an amount of Life Insurance that will do more than just cover the basics.

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