How much life insurance do you really need? Avoid overpaying or underinsuring

Not sure what type of insurance, how much cover or if you even need insurance?

How much life insurance do I need? This is the all-important question many Australians struggle to answer when looking to protect their family’s financial future. Putting a price on your life is no easy task, and the reality is that the right amount of life insurance varies depending on your personal circumstances and the state of your finances.

Two simple ways to work out how much life insurance you need

finder's calculator can help you work out how much you need in a few minutes. Simply enter your expenses into the fields below to work out how much cover you need and to take the first steps towards a secure future for your loved ones.

To work out the correct amount of cover you need, you will have to calculate how much money your family would need in order to maintain their current standard of living if you were no longer around. A simple way is to make a checklist of what you need covered:

  • Your family's debts. This includes your mortgage, credit card, car repayments and any other money you owe.
  • The income you currently provide. This pays for school fees, utilities and regular expenses.
  • Your funeral expenses. This is an estimate of funeral and legal costs at the time of your death.

A good idea is to also consider what assets you have that you or your family could turn into cash. This will help you avoid over insuring.

Assessing your needs in detail

You will need to look at the debts that your family will still need to pay in the event that you pass away. Each year, families are left devastated not only by the loss of a loved one but by the debt they must cover following their loved one's passing. To determine an appropriate amount of cover, you need to take into account any debts you currently owe, such as the following:
  • Your mortgage debt. This is not restricted to your current home since you will also need to consider investment properties and holiday homes.
  • Any outstanding loans. This may include personal loans, investment loans, business loans and car loans.
  • Existing credit products. You need to take into account money owing on credit card and charge accounts.
You will need to consider the current expenses that your family will still need to pay if you were to suddenly pass away. These expenses include the following:

  • Annual living costs. This includes food, clothing, bills, taxes, school fees, petrol, etc.
  • Any investments you may have. Consider property or any other investments that you currently have. Would you want your surviving family members to maintain these if you were to pass away?
  • Homemaker duties. Consider how much it could cost to cover the unpaid duties that you regularly carry out throughout the home. The cost of home maintenance, housekeeping and child minding can come as a great shock to many.
It's important for you to consider all sources of income that your family members may be entitled to after you're gone. This may include the following:

  • Current savings
  • Employer benefits
  • Investments
  • Funds accumulated in superannuation

What type of life insurance do I need?

It is ironic that most people won’t have any second thoughts about getting insurance for their cars, homes and health but overlook things like protecting their families and their incomes in the event of illness, disability or sudden death.

Below is a list of the important types of life insurance you may want to consider:

Term life insurance

Life insurance protects your family from financial stress in the event of your death.

What to consider when deciding on a cover amount

  • Your debts
  • The cost of raising your kids
  • Your funeral requirements

Income protection

Income protection gives you coverage when you are unable to work due to severe illness or extreme physical injury. Regardless of whether you are single, it is wise to have some money to depend on if something unfortunate happens. Income protection can help you cope financially because it pays you up to 75% of your income. It covers you until you are ready to re-enter the workforce or until retirement age in cases where there is total disability.

What to consider when deciding on a cover amount

  • How much money you need to keep up your lifestyle
  • How much sick leave you have

Critical illness insurance

Critical illness insurance helps ease the financial stress and burden brought about by a serious illness by paying you a tax-free lump sum. This insurance covers you from the time you are diagnosed with a critical illness until you have fully recuperated. Although not all types of illnesses are covered, it does cover the most common terminal illnesses such as cancer, kidney failure, major organ transplant and multiple sclerosis. Critical illness insurance is important because it can boost your finances in times of emotional and financial hardship.

What to consider when deciding on a cover amount

  • The amount you need that will allow you to live comfortably.
  • The rough costs of living with a major illnesses such as cancer.

Total permanent disability (TPD)

Total permanent disability insurance acts as a safety net in the event of an accident which results in total disability. It also pays you a lump sum to replace any lost income because of your inability to work due to the permanent disability. You should not confuse this with income protection because TPD pays only when you are completely disabled.

What to consider when deciding on a cover amount

  • How much you will lose from not working
  • Your ongoing expenses
  • Your debts and mortgage
  • Costs of changing your life style, such as hiring a carer
  • Modifications to your home

What premium is right for you?

When shopping around for the perfect policy, you will come across a number of insurance terms you might not be familiar with. This unfamiliarity could lead to you getting the incorrect policy for you and your family.
In order to purchase the right policy, you should know which type of insurance premium you want. There are three kinds of premiums:

  • Stepped Premiums. These are calculated on a person’s age. The younger you start with a stepped premium, the cheaper it is. However, as your age increases, so does your premium.
  • Level Premiums. These premiums work the exact opposite of stepped premiums. Here, you tend to pay much higher at the beginning but pay less as you grow older.
  • Hybrid Premiums. Hybrid premiums increase until a pre-determined age and then level off. This option is not offered by all insurers.

A stepped premium may seem to have the advantage because it is much cheaper, but if you think about insurance on a long-term basis, you will see the wisdom of having a level premium.

Learn more about how stepped and level premiums work

How much life insurance can I actually apply for?

Maximum Sum Insured

The amount of life cover you can take out will be dependent on both your situation and the policy you decide to go with. Many life insurance policies will offer a maximum-sum insured on policies, which can be adjusted depending on your age, your occupation and other personal features. Other policies will enable you to take out as much cover as you desire.

Maximum Cover for Additional Benefits

Additional benefits will often have a maximum benefit amount that is applied. For example, the Zurich Protection Plus - Death Cover plan will provide your family with funeral expenses up to a maximum of $15,000.

Maximum Sum Insured for TPD

Life insurance underwriters will closely consider the amount of cover you apply for in a TPD plan to insure the amount does not surpass what you would be entitled to if you had remained working. Life insurance companies do not want to make payments that result in you “milking” the system by making more than you would if you were to continue working.

Maximum Sum Insured for Trauma

Similar to TPD, you will need to explain your reasoning behind taking out a high amount of trauma insurance cover. It is not enough that you can afford the premiums. You must show why your situation requires such a substantial benefit payment. Most policies will only offer up to $2 million in cover.

What could impact the amount of cover that I can take out?

  • Your age
  • Your occupation
  • Any pre-existing conditions that you may have
  • Dangerous pastimes/hobbies that you are involved in

Some common life insurance myths

Despite knowing the benefits that life insurance can bring, people still procrastinate when it comes to getting insurance. Two of the most common reasons why people don’t buy insurance are that it is too expensive and that it is too complicated to understand.

Furthermore, there are a lot of myths regarding life insurance. To separate fact from fiction, it is best to look into these myths closely.

Getting the right level of cover is critical

Approximately 95% of Australians with dependent children do not have sufficient life cover in place. Many people will rely on the default level of cover provided in their superannuation but fail to determine how much their family would actually need in the event of their death. It is critical for all Australians to closely consider how much cover they have in place and to have a clear understanding of what their family would need following their death.

*The information provided on this page should only be used to help you determine a rough estimate of the amount of cover you may require. finder.com.au recommends you consult an adviser prior to taking out cover if you need assistance in determining an adequate amount of cover.

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Coverage is the amount of money that you will be paid in the event of a claim. An insurance consultant can help you determine an appropriate amount. Calculator
Provides a lump sum payment if you become totally and permanently disabled and are unable to return to work.
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Richard Laycock

Richard is the insurance editor at finder.com.au. He is on a mission to make insurance easier to understand.

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