How Much Life Insurance Do I Need?
Everyone is different and therefore no ‘one answer fits all’ response can be provided. Consideration needs be given to your family’s financial position which takes into account personal assets, income, debt, expenses and life goals. However as a generalisation most personal risk advisers will recommend that you have life cover equivalent to a minimum of 10 times your average annual income. Life insurance must be tailored to your need and the level you require may be higher.
There are a number of free online tools that can help you work through this question based on your family’s financial position. For the purpose of illustrating how individualised the needs are I will refer you to free no obligation Insurance Risk Calculator (see the bottom of this article) that I am familiar with or you can Google ‘Insurance Risk Calculator’ to find one you prefer. The output from the calculator will form part of a personal needs analysis and guide us through a process of considering how much life insurance you need.
An important thing to remember when addressing the ‘how much’ question is that there are different types of life insurance. There is cover for death, disability, loss of income and a medical trauma. So the amount of cover you need is dependent upon not only your financial situation but under what circumstances you require cover and how important that is to you. This should be quite evident from the personalised results you obtained from the calculator. Some situations will require your focus more so than others.
If you or your partner were permanently disabled or died prematurely you need to consider the costs associated with:
This is where a lump sum payment through a Term Life Insurance policy and/or a Total and Permanent Disability (TPD) Insurance policy would assist.
If you or your partner became sick or were injured and couldn’t work you need to consider the costs associated with:
This is where a regular income stream through an Income Protection policy would assist.
If you or your partner suffers a major medical illness (heart attack, cancer, etc) you need to consider the costs associated with:
This is where a lump sum payment through a Trauma Insurance policy or Crisis Recovery policy would assist.
It is important to note from the examples above that it is a combination of the various types of personal risk insurance that provide the best protection.
Based on your situation, either as a result of the calculator or through having a broader understanding of the impacts, you now know that the cover you require must be tailored to your situation. Many people fall into the trap of purchasing term life insurance without considering their needs and the impact of life’s hazards (injury, illness, permanent disability, medical traumas and death). The solution should be customised to provide a personalised risk management strategy that matches your needs. A good personal risk adviser can do this for you and usually within your budget.
Therefore the amount of life insurance cover you need really is a very personal question.
