Do you just cover the mortgage or leave enough for your family to enjoy life? Here are some things to consider when working out how much life insurance you require.
Life insurance is designed to give you peace of mind – ensuring your loved ones can cope financially if something happens to you. Here are tips for working out the right amount of life insurance to provide certainty for your family.
Getting started
Put together a realistic picture of what you want your family's life to look like if you’re no longer around. To get started, gather the following information about your financial situation: your monthly expenses, debts, assets, liabilities and investment priorities.
Also consider how much your partner earns. Is it enough to cover outgoings if you’re not around? If you have kids, do you want them to go to private or public school? Then think about a sum insured that will do more than just cover your debts.
Emotional costs
“People often overlook changes they might make to their life if their partner died,” explains financial adviser Myles Thornton of Thornton + Lee. “For example, would you want to stay living where you are or move closer to family? And is there a cost involved in that?”
If you’re a high-income professional and your partner who’s been the primary carer, passes away, would you still want to work until 8pm every night? Advisers often find that after the death of a partner, people want to work fewer hours so they can be more emotionally available for the kids because they've lost a parent. That comes at a financial price.
If you need help looking after the children, that may also cost money. These are extra costs you may incur if your partner dies that many people, understandably, have never considered.
What does a minimum amount look like?
The bare minimum is always covering debt on a primary residence. If you don't do anything else, at least make sure you leave your family with a roof over their head.
Myles says that once you've covered debt, you should look at your household expenses. “If expenses outside of debt are $8,000 a month, that's $96,000 a year you need to come up with,” he says. “Try to get a sense for how much income the remaining partner, will generate. If they’re unlikely to earn enough to cover those expenses, you need a lump sum that will provide a level of income for a period of time. This may be until the children are out of home or it could be until retirement.”
What does a maximum amount look like?
You can just cover the basics and that’s fine. But there’s also the option of providing an income stream that will enable those you leave behind to still go on holidays, help children buy their first car or pay for their wedding one day. Definitely think about the living standard you want your family to have in the future.
Find a financial adviser to help you receive the correct level of life insurance cover for your needs.
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