How much life insurance you need
When it comes to how much life insurance you need, it’s a bit like “How long is a piece of string?” (2 times half its length). What this means is that its is going to be different for everyone and depends on what your circumstances and goals are. Its also varies over time as circumstances change, so there is no simple answer other than what your super fund gave you as default, is probably wrong. Some factors to consider when choosing a cover amount include total household income, any debts, future expenses, and number of dependents.
As a starting point, Moneysmart has a life insurance calculator that can help you to form some goals and estimate some amounts. It is pretty simplistic and not as comprehensive as what we use to calculate insurance needs through the financial advice process, but it’s a good starting point.
There are many financial aspects for families after the premature departure of an income generator or carer that need to be considered when calculating life insurance levels. Some potential needs are discussed below.
Cover the cost of my funeral
When considering how much life insurance you need, one important factor to take into account is the cost of funeral expenses in Australia. Funeral costs can vary widely depending on the type of funeral you want, but the average cost of a funeral in Australia is around $4,000 for a basic one up to $15,000 for a more elaborate one.
If you want to make sure your loved ones are not left with a large bill to pay after you die, you should consider taking out a life insurance policy with a sum insured that has considered the cost of a funeral. Doing so will help to ensure that your loved ones have the money they need to cover the cost of your funeral and give you peace of mind knowing that your final expenses are taken care of.
Pay off my mortgage
A home loan and life insurance are two of the most important financial products you’ll ever buy. But how do you know how much life insurance you need to cover your mortgage?
There’s no one-size-fits-all answer, but there are a few things to consider:
- First, think about the mortgage amount you’ll need to cover. This should be the mortgage balance at the time of your death, not the original loan amount;
- Second, consider the number of years remaining on your mortgage. The younger you are, the longer your mortgage is likely to be;
- Finally, think about the interest rate on your mortgage. A higher interest rate will mean a higher mortgage balance over time.
The sum insured of a life insurance policy can be reduced over time inline with your mortgage. Of course many people move home or upgrade their home and may need to borrow more funds. This should be a consideration before you reduce your life insurance sum insured as increasing this cover again due to changes in circumstances will likely require medical or financial underwriting which means as get older, health events occur making insurance harder to obtain without exclusions or premium loadings.
In Australia, the average mortgage size is about $600,000. So, if you have a mortgage of this size, you’ll need a minimum sum insured of $600,000 to make sure your family can pay off the mortgage if something happens to you.
Of course, this is just a rough guide – your actual insurance needs will depend on your individual circumstances. It may not be important at all to pay the mortgage off in the event of death, but this is a common goal and a good starting point for thinking about how much life insurance you need.
Clear other debts
If you have a credit card debt, car loan or personal loan, you’ll need to make sure that your life insurance policy has a sufficient sum insured to pay off those debts in the event of your death.
In Australia, the average credit card debt is $4,200, while the average car loan is $31,000 and the average personal loan is $15,000. So if you have any of those debts, you’ll need to make sure that your life insurance policy has at least that much coverage. Otherwise, your loved ones will be stuck with those debts after you’re gone.
Pay for my children's education
When it comes to life insurance, one of the most important considerations is how much life insurance you need. This is especially true if you have children, as you’ll want to make sure their education expenses are covered in the event of your death.
So how much life insurance you need to cover education expenses in Australia? The simple answer is that it depends on the education expenses themselves.
If you have a child who is attending a private school, for example, their education costs will be higher than if they were attending a public school. As such, you’ll need to take this into account when determining your sum insured.
Ultimately, the amount of life insurance you need to cover education expenses in Australia will depend on your individual circumstances. However, by speaking to a financial advisor and considering all of the factors involved, you can ensure that your family is taken care of should the worst happen.
Help with my family's living costs
When it comes to life insurance, one of the biggest questions is how much life insurance you need. There are a number of factors to consider, but one of the most important is the loss of income from the breadwinner. If the breadwinner were to die, the family would need to replace that income in order to maintain their standard of living. Therefore, the sum insured should be enough to cover the family’s living expenses for the future.
One way to determine how much coverage you need is to calculate your family’s living expenses. This includes things like mortgage payments, food and utility bills, and any other regular expenses that would need to be covered if you were no longer around. Once you have an idea of your living expenses, you can then compare that to the sum insured on your life insurance policy. The goal is to make sure that your family would be able to maintain their current lifestyle in the event of your death.
Of course, life insurance is just one part of a comprehensive financial plan. But it is an important piece of the puzzle, and it’s worth taking the time to make sure you have the right amount of coverage in place. With a little planning, you can give yourself and your loved ones peace of mind knowing that they will be taken care of financially if something happens to you.
Another important factor to consider is whether or not you have a stay-at-home partner who provides care for your children. If you do, then you’ll want to make sure that there’s enough life insurance in place to cover the cost of a nanny or day-care should your partner pass away.
The Bottomline
The bottomline is that you need to figure out how much life insurance you need based on your individual circumstances. This includes taking into account things like your total household income, debts, future expenses, and number of dependents. Once you have all of that information, you can start to look at different policy options and find one that fits both your needs and budget. If you’re not sure where to start, Wealth Factory can help. Our team of experts will take a look at your unique situation and recommend the best course of action for you. So if you’re ready to get started on finding the right life insurance policy for you, get in contact with Wealth Factory 07 4659 5222 to discuss your options today.
