If you are looking to purchase life insurance for the first time or to review your level of life insurance cover then knowing how much life insurance you need is an important starting point.
Should your loved ones be claiming life insurance you want to be absolutely certain that the amount of money you leave to your loved ones is enough for everything to be taken care of.
Historically there was a rule of thumb that the amount of life insurance you are after should be 10 times your annual income. This is effective, however a more logical approach is to calculate how much money your dependents would need to maintain the same quality of life, make the bill payments and manage with the loss of your income in the event of your death.
So a simple way to assess this is making sure you have enough cash paid out to clear any of your outstanding debts and leave your dependent with a nest egg for investment.
Things to consider when buying life insurance
Recent New Zealand studies carried out by Massey University researcher Natalie Wang found some people who were left behind after a death were unable to manage financially or suffered a drop in their standard of living because the life insurance payout (if there was one) was not sufficient to cover all the costs and keep up payments on mortgage or other related expenses.
If you are looking to calculate your level of life insurance cover there are a number of simple questions to ask yourself.
1. What are your current financial obligations? For example, how much would you need to pay to clear your outstanding mortgage?
2. What other debt do you have? For example, what is the outstanding balance on any credit cards, personal loans or hire purchase agreements?
3. Will your family need an ongoing income in the event of your death?
4. Do you have children that you would like to provide for? Especially around things like education – for example this might include school fees, school uniforms or university tuition fees.
5. Funeral expenses – On average a funeral is found to cost just under $9,000. Would you like this covered in the event of your death?
Once you have thought through the above, you’ll have a good idea of the level of cover you need. The majority of Kiwis choose for their life insurance policy to cover all the outstanding debt on their mortgage. However, some choose to cover less as the bigger the cover the more expensive the premium so this all requires weighing up and you can reduce your premiums if a surviving partner has enough income or savings to make the payments without help.
If you have children and you want to provide for them many people often start with an equivalent of a replacement income – For example, if you earn $60,000 a year you could choose to include this amount in the lump sum you're insured for and then multiply it by the number of years the child or children will need the income, perhaps until they are 18 years old.
The bigger the amount of cover you are looking for the greater the cost of the premium (as a general rule) and working with a life insurance broker or specialist adviser will help you find the level of life insurance cover you need on average.
A recent survey found the following levels of cover on average for a Male aged 40 years.
$100,000 = 6%
$200,000 = 8%
$300,000 = 9%
$400,000 = 7%
$500,000 = 30%
$600,000 = 6%
$700,000 = 7%
$800,000 = 4%
$900,000 = 1%
$1,000,000+ = 22%
Check your life insurance cover on a regular basis - Get a free health check
Life insurance is not a ‘set and forget’ type of product. You should review your life insurance on a regular basis and in particular if your personal circumstances change to any great degree. For example, major life stages or changes like getting married, having children (first or more than one), buying a house, or retiring. At various times you should review your life insurance and check to see if you need to increase or reduce the amount your cover insures you for. If you forget to review your life insurance policy you may be paying too much or too little and be over or under insured.
Hopefully you now have a good idea of how much life insurance you need – a good life insurance broker will walk you through the decision and ensure you have the right amount of cover at the right price. Life insurance broker services are generally free of charge and they offer you independent, transparent and free advice to get the best life insurance for your needs.
Ready to check out the options? Click here to start a quote request with one of our trusted life insurance advisors.