How much life insurance cover is enough?
This simple formula will give you an idea of how much life insurance cover it may take to secure your family’s future.
Life insurance isn’t sexy, but it deserves more attention than it gets. Australians would definitely be better off on average if they committed 1% of the time they dedicate to reality television to the topic.
An appropriate insurance strategy for your family requires proper advice. But consumers can prepare themselves before seeking help when deciding how much cover they need. The simple five-point formula described here is a good start.
First of all, how much would be needed to pay off all outstanding bills if you died today? This amount is the “clean-up fund”, and counts as liability number one.
Secondly, can you give a rough estimate of the present value of your future income? If you weren’t around, your family would suffer more than the loss of a parent or spouse; the earnings of that person would suddenly disappear. But life insurance written to an adequate level can help replace the income lost when a primary or secondary earner dies.
Next is the outstanding amount owed for your home loan. This should go down as the years pass, of course, so an adequate level of life insurance in a few years’ time will be different from what’s best today. A payout should cover what’s owed to the bank on your home loan.
Families whose children have the expensive end of education in front of them should estimate how much that will cost and include it in their calculation for cover.
The last great expense is income in retirement, and a life payout to the right level will provide enough for a widow spouse to carry on a comfortable life after work ends.
A comfortable sum
The total of these five amounts (Clean-up + Income + Mortgage + Education + Retirement) will give you a rough guide as to how much life cover is enough to provide for most of life’s certainties. Remember, this is an estimate only. A decision about life insurance should always follow consultation with an expert.