How much should I spend on life insurance?

In these budget-conscious times, we asked 5 financial experts how people should plan their life cover.

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When the squeeze is on for household costs, it's hard to decide how much of your earnings should go towards your life insurance.

You don't want to underspend. The last thing you want is your loved ones struggling if you were no longer around. But, you'll also want to avoid paying big for your premiums – especially if any payout exceeds what your family needs.

What to spend on life insurance: Expert verdicts

We sought the views of a diverse range of finance experts to help you think about how to budget for life insurance.

Important note: Any information here is general and should not be taken as advice. Individual circumstances must be taken into account for any decision on personal finance.

Money coach Sarah King told Finder that everyone should consider insurance and review their insurance "annually", and make a provision in their budget "set aside for insurance coverage". Here are 4 more expert views.

Angel Zhong: Senior lecturer in finance, RMIT University

Angel Zhong

"Living expenses are climbing. For those who are struggling with covering daily expenses and do not have dependants, life insurance may not be a top priority. For those who have no problem with cashflow and do have dependants, it is a wise decision to set aside money to purchase life insurance to protect their loved ones.

Life insurance is useful for business owners with heavy debts, whose dependants and partner may find it difficult to keep the business running upon the sudden death of the owner. It is also valuable for someone with young children to ensure proper cashflow if something goes wrong."

Gary Hunter: Insurance expert, Finder

Gary Hunter

"You should weigh your immediate and future life circumstances when thinking about your cover needs. The key to this is your financial security. To work out your position, see how much is left after this simple maths: 10 years of your income, minus tax, plus your debt, minus super.

Life insurance is all about covering your debt and your income. To work out a lump sum your family might need, jot down your monthly take-home pay (after tax). Then cut out any personal expenses or bills that won't be payable if you were to die – for example, your gym membership. Once you have this figure, multiply it by 12 to get a year. And then by at least 10.

This will leave you with a minimum for how much your family would need to continue to meet the cost of living based on their current lifestyle."

Need help with the maths?

Finder's life insurance calculator can help you to figure out what you'd need to pay off your debts such as your mortgage and to meet ongoing expenses such as food and filling up the tank.

Financial planner Brenton Tong, managing director of Financial Spectrum

Brenton Tong

"Term life cover is usually pretty cost-effective, so you can expect about $1 million of life insurance to cost you around $150–$300 per year if you're fit, in your 30s and a non-smoker. As you get older you can expect costs to start to increase. By the time you're in your 40s, this will increase to about $500 per year. Once you hit 50, prices will generally climb to levels that won't be sustainable.

It's always important to make sure that you're covered for sufficiently. So, for life insurance, as a general guide you want at least the total of your home mortgage and, if you have children, 5–10 times your salary. The age of your children will matter because if they're just about to move out of home, you don't have as much time you need to look after them if a parent dies suddenly.

Shopping around can yield some pretty big differences in price. You can easily find up to 50% variation in premium costs when you go from one insurance company to another. However, it's important to understand that there are also important quality aspects that you need to take into consideration. Don't take the chance on a policy that isn't medically underwritten. While they are cheaper, they're often not worth the money."

Phil Thomson: Director of Skye Wealth, which offers tailored personal insurance advice

Phil Thomson

"I don't have a set [budget] guidance, because you could be on the same income if you're an accountant or a bricklayer. Your insurance budget would need to be much higher as a bricklayer. The risk of you being off work if you're injured is far higher than if you're sitting at your desk.

A good rule of thumb is to consider having enough funds to pay off your mortgage and, most importantly, replace your after-tax income for a certain number of years – 10 years of after-tax income is a good starting point.

However, everyone's situation is unique. It's best to reach out to a financial adviser to speak about the balance between protecting the financial burden of a loved one passing away and the cost of the premium."

You could save by buying life insurance sooner rather than later – you're considered more of a risk to an insurer as you get older. Compare your life insurance options now.

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