Determine how much cover you may require and the benefit you will receive with the life insurance cover calculator.
While most people will accept that they do require some form of personal insurance, it is not always clear how much cover to actually take out. Without taking the necessary steps to determine how much cover your situation actually requires, you can place yourself at risk of taking out too little or too much cover.
A life insurance calculator can help you determine an appropriate level of cover so you can get an initial idea of how much you can expect to pay for cover.
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Calculating life insurance at different life stages
What many people forget after spending time to compare different policy options is that they still need to continue to review the level of cover they have in place as their financial situation continues to change. As people enter different stages of their life, their financial obligations can shift dramatically and they may actually be required to consider taking out additional cover or even decreasing the amount of cover they have.
Life events that may lead someone to consider adjusting their level of cover include:
- Birth of child
- New home
- Children move out of home
Consider these key life stages:
- Young and single. When you are young, single and just starting to enter the workforce, the amount of life cover that is required may only need to be enough to pay any debts you have accumulated. You may also consider to cover the cost of your funeral, to avoid leaving your family with this expense.
Young professional. At this life stage, all the hard work you have poured into building your career will have resulted in significant growth and development. As your earnings increase, so will your debts, either short or long-term. This is a time of life that many are faced with long-term commitments, both financial and personal, such as purchasing your first home or settling down with a partner. When considering the life insurance coverage you may need, think about:
- Debts you have accumulated: Such as credit card debts, student loan (HECS), car loan, and personal loan.
- Long term partner: Whether or not you have a long-term partner (you may be in a de facto relationship or newly married), consider all the financial obligations in your relationship that your partner will have to put in order and how you can minimise their financial burden if you were no longer around to protect them.
- Your living arrangement: If you are renting or have a mortgage on your home with your partner, consider how your life insurance benefit payout can help paying off those long-term expenses and for how long you will continue to provide for them.
- Funeral expenses: It is not uncommon in Australia for funeral arrangements to run into tens of thousands of dollars, which is why it is important to factor in this expense when considering your life cover amount.
- Young married couple with children. Things will change when you are married, have bought your first home and are starting a family. You carry a considerable responsibility to ensure that if something should happen to you, your family can continue to live to their accepted standard of living, and their plans for the future can still be carried out. One benefit of taking out cover at this age is that you have the opportunity of locking in a competitive premium while you are in better shape and considered less of a risk to insurance providers.
- Matured family or retired. As the children begin to move out of home and the mortgage is finally paid off, you may have less financial obligation to manage. The life insurance coverage you may need at this stage may only be enough to cover any outstanding debts you may have, including your funeral costs. You may also want to consider medical expenses or legal fees for the settlement of your estate if you are in a later stage of life. Remember that you may not have steady flow of income at this point, which you will need to factor in if you are considering to reduce your sum-insured.
Determining an appropriate amount of your life insurance coverage to match your needs and situation may not sound like a simple matter. The important thing is to continuously review your existing life insurance policies and make sure that there is enough coverage to reflect any significant life changes. An insurance calculator can help you carry out this process.
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The life insurance calculator
A life insurance calculator is to be used as a general guide to provide an estimate of the amount of cover you may require based on current outstanding debts and income. finder.com.au recommends that the calculator is only used to help you retrieve a preliminary quote before discussing your level of cover with a certified insurance adviser.
- Existing Debt: Write down the full amounts owing on all your current, existing debts. Not what you pay off the debt each month but the total amount owed plus interest. As an example, you might owe $400,000 on your mortgage, $25,000 on your car, $10,000 on your credit card and so on.
- Future Debt: Covers things like your funeral expenses and the expense of your children's education.
- Maintaining your family's standard of living: In order to find a cost relating to your family's standard of living you will need to work out how much it costs you for food, clothing, rent if you are not buying your own home, entertainment, replacement of household items, transport, anything and everything you actually pay each month, multiply that figure by 12 to get an annual cost, allow for inflation and multiply your yearly cost by however long it will take your youngest child to reach 18.
Once you have done all this you can subtract any present life insurance cover you currently enjoy and at this stage you will have calculated your life insurance needs.