If you have a family, you need to make sure they are protected even after you're gone. Find out how much life insurance you need to protect your family.
Life insurance coverage is a crucial consideration for all Australians, offering important financial support for you and your family when things go wrong. However, determining the right level of cover to take out can be difficult for many people, so this article explains in simple terms how you can get the cover you need at an affordable price.
The peace of mind and financial protection that life insurance offers make it an essential form of cover for many Australians. Making the decision to take out cover is a sound financial decision, but the next step of working out exactly how much cover you need can be quite difficult. However, if you take a little time to consider your needs and ask yourself a few important questions, it’s easy to determine an adequate level of cover. Studies have shown that the average Australian needs cover equivalent to at least 10 times their annual earnings — so if you earn $75,000 a year, the rule of thumb would be to take out at least $750,000 of life cover. To really get a clear idea of how much cover you need, ask yourself the following:
- How much would I need to repay the mortgage and any other outstanding debts?
- How much would my family need to get by on a day-to-day basis without my regular stream of income?
- What about future financial obligations? How much money would your family need to meet them and also maintain their current standard of living?
- How much money would they need to meet immediate expenses, for example funeral costs?
Answering these questions and calculating the future financial needs of your loved ones is the best way to work out just what level of life insurance cover you require.
When working out your insurance cover requirements, remember that the primary purpose of insurance is to return your finances to the same state they were in before an insured event occurred.
Breakdown of expenses
One way to determine how much cover you need is to use the CIMER method. CIMER stands for:
- C — Clean-up fund. How big a payout would you need to settle all your outstanding debts, including everything from credit card debts to funeral expenses?
- I — Income. The payment required to replace your regular income and ensure that your loved ones can maintain their current standard of living.
- M — Mortgage. The lump sum required to pay off your mortgage.
- E — Education. This is a lump sum calculated by adding up the education costs for your children, including school and university.
- R — Retirement. The lump sum benefit you would need to be paid to adequately fund your retirement.
The resulting CIMER figure you reach is then the recommended sum insured. There are several other formulas you can use to calculate the ideal sum insured, but it’s important to consider your specific needs in detail rather than simply sticking to a rigid formula. Also remember to take into account the funds that you have tucked away in savings that your loved ones may be able to use to offset expenses when you die, plus the fact that you may have a handy sum stored away in your superannuation fund.
- But I already have some other life insurance cover in place — why do I need to take out more insurance? It’s true that many Australians will already have some form of protection in place. For some, their employer may offer staff insurance benefits as part of their salary and employment package, so check with your employer to find out the level to which you are covered and any benefits you are entitled to.
- What cover do I have through super? In addition, nearly every Australian will have a superannuation account and by law, all super funds must offer at least a basic level of insurance cover to its members. You’ll need to contact your super fund to find out what type and level of cover you have in place, plus it’s also worth remembering that if you have more than one super fund, you might have more than one policy providing protection.
- Is my cover through super enough? As a general rule, life insurance through superannuation offers quite a low level of cover. While this is adequate for some people, it’s simply not enough to help many Australians look after the financial obligations of their loved ones when they are no longer around. With this in mind, it makes good sense to assess your current level of cover and decide whether or not taking out standalone life insurance could benefit you.
There are several types of cover available through a life insurance policy, such as:
- Life cover. Life insurance offers a lump sum benefit payment to your beneficiaries when you die or are diagnosed with a terminal illness. You may also see this type of insurance referred to as term life insurance or death cover.
- Total and permanent disability (TPD) insurance. TPD cover provides a lump sum benefit when you suffer an injury and become totally and permanently disabled. This benefit can be used to cover things like rehabilitation costs, loss of income, debt repayments and any other changes to your lifestyle and the future cost of living.
- Trauma cover. This type of policy offers financial support when you are diagnosed with a specified illness or injury. Also sometimes referred to as critical illness insurance, trauma cover is designed to offer a benefit payment when you suffer a serious illness or injury, such as cancer, stroke, heart attack or major head trauma.
- Income protection insurance. When you suffer an injury or illness and are unable to work for an extended period of time, income protection cover offers an ongoing monthly benefit to replace your regular income. Offering payments equivalent to up to 75% of your income, this type of insurance can help you stay on top of any bills and manage the ongoing cost of living, leaving you free to focus on your recovery.
Although you may be earning great income and be an excellent provider for your family, it’s impossible to predict the future and what troubles may lay ahead. Your life can change in an instant, so life insurance cover is all about taking steps to plan for the future.
- How would your family manage financially if, all of a sudden, you suffered a serious illness or injury and were unable to work? Not only would they not be able to rely on your regular income to meet ongoing expenses and repay the mortgage, but they may also have to cover expensive rehabilitation costs and make significant changes to help maintain your standard of living.
- Even worse, ask yourself how your family would manage if you were to die unexpectedly? While you may be managing everyday expenses and debt repayments just fine at the moment, without you around to provide for them, your loved ones could be placed under enormous financial strain.
Life insurance, in all its shapes and forms, is about offering financial protection for your family no matter what the future holds. The phrase ‘peace of mind’ is thrown around a lot when it comes to insurance, but that’s exactly what life insurance provides for you and your loved ones.
- Look to your super fund. If you’ve decided you need life insurance cover, your first port of call should be your super fund. Life cover from a super fund is typically cheaper than a standalone policy, so it may be worthwhile to examine your insurance options through your super provider first. You may be able to increase your cover from the default level provided to better suit your requirements.
- Do your research. If you decide to purchase a standalone policy, it’s important that you shop around and do plenty of research. We’ve already explained just how crucial life insurance cover can be for you and your family, so choosing a policy definitely isn’t something you should rush into.
- Use comparison services. Wrapping your head around the myriad policy options and benefits available can take a little while, so the best place to begin your search for cover is at finder.com.au. We’ve got a huge database of information on Australian insurers and their policies, and we’re happy to explain all those confusing terms and technical jargon to you.
- Weigh up the benefits and features. Next, it’s important that you compare policies from a number of insurers to see what benefits and features are available. The list of general exclusions on each policy should also be examined closely, while obtaining multiple quotes will give you a good idea of how much cover will cost and whether you are getting value for money.
- Don’t avoid it. It may be an uncomfortable topic of discussion for you and your family, but don’t put off sorting out your life insurance needs. Having an open and honest discussion now can make an enormous difference in the future.
- Don’t just insure the breadwinner. While one spouse might earn a significantly higher amount than the other, don’t assume that you only need to insure the major breadwinner. The other spouse may perform critical duties, for example looking after and raising the children, so their death or disablement could also place a huge financial burden on other family members.
- Check your super. Assess the level of life insurance cover you have through your super fund — is it adequate or do you need a higher level of cover?
- Be honest. Be honest with yourself about how much cover you really need. While it can be tempting to ‘talk down’ your requirements in order to save money, this could backfire in a big way in the long run.
- Understand your premium structure. You need to know the difference between stepped and level premiums and which one is suitable for your situation. See below for tips on what to do here.
- Read the PDS. The importance of this step cannot be understated. Reading the PDS closely is the only way to familiarise yourself with the full range of features, benefits, limits and exclusions that apply to each policy.
- Obtain multiple quotes. Compare the prices and features of two or more insurers to see who offers better value for money.
- Automatic increases. Check to see whether indexation applies to your policy so that your sum insured will keep pace with the rising cost of living in the future.
As a general rule, insurance premiums will rise as you age because you are more likely to make a claim. However, when taking out life, TPD or trauma cover you have the choice between stepped and level premiums. Stepped premiums starts out cheap, but the cost of cover will rise every year as you get older. On the other hand, level premiums cost more at the start but will remain at the same amount as you age. Choosing a premium structure to suit you will depend on your own budget and life insurance plans. For example, if you like the security of set premiums now and well into the future, level premiums are great. They will also work out to be more cost effective if you plan to hold cover for a long time. Finally, some insurers will also offer hybrid premiums, which provide a combination of stepped and level premiums, so speak to your provider about the cost of cover.
Finding the right level of life insurance cover for your family is not an easy task but it is an important one. From death and trauma cover to TPD cover and income protection, taking out an adequate level of cover for your loved ones will offer them much-needed financial protection against the uncertainties of the future.