Life Insurance

Life insurance can be purchased both inside and outside of superannuation. For many Australians with employer superannuation, the superannuation fund may contain a level of life and disability insurance. In many instances this level of insurance cover may be insufficient to provide for yourself or your family in the event of a claim. This is known as being under-insured. So how much cover should you have?

How much is enough insurance for your family?

When determining your life insurance needs there are two areas to consider.
1. Your current level of debt
2. The recipients need for income
3. Your current debt level

This consists of your mortgage, or the cost of a house if you are renting plus any current household debts; namely credit cards, personal loans, loans on motor vehicles etc. An allowance of $10,000 to $15,000 for funeral costs should also be added. Simply add this up to determine what your total debt level is. Your life insurance should completely pay this out so as not to leave a liability legacy for your family.

Once this is tallied up then income requirements need to be considered.
Income for the remaining family members or loved ones is crucial for maintaining an ongoing living standard.
What are the considerations.
Do you have a partner that is earning income, if so will that income be sufficient or will it need supplementing (at this point remember the house is paid for)?
Do you have future expenses that you know will occur like schooling, if so, how much will it cost in todays dollars?
Example income calculation.
I need $70,000 per year to live ( allowing for no household debt)
Current term deposit rates stand at between 6.0% and 6.50%.
To produce an income of $70,000 per year you divide the amount of annual income by the interest rate.
$70,000 / 6% = $1,166,666
This makes no allowance for taxation or inflation over time. To factor in inflation deduct between 2% and 3% per year off the return.

To make sense of this a family with household debts of $500,000 and an income requirement of $70,000 per year would need a minimum of ($500,000 + $1,166,667) $1,666,667 term life insurance.

Disclaimer: This is general information only, any reference to inflation, interest rates, taxation issues are provided in the context of general information only and should not be relied on as fact or interpreted as advice by us to you. You should seek the advice of qualified legal, taxation or financial professional to determine the needs for your personal situation.

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