How do you determine your life insurance needs?

Posted by Bethany Shaw on 14 February 2017

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how muchIf you need life insurance, it is important to know how much and what kind you need. Although generally renewable term insurance is sufficient for some people, you have to look at your own situation. As with investing, educating yourself is essential to making the right choice.

A large part of choosing a life insurance policy is determining how much money your dependents will need. Choosing the face value (the amount your policy pays if you die) depends on:

How much debt you have:

Aim to pay off your debts in full, including car loans, mortgages, credit cards, personal loans, etc. If you have a $250,000 mortgage and a $10,000 car loan, you need at least $260,000 in your policy to cover your debts (and possibly a little more to take care of the interest as well).

Income Replacement:

One of the biggest factors for life insurance is for income replacement, which will be a major determinant of the size of your policy. If you are the only provider for your dependents and you bring in $80,000 a year, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. To err on the safe side, assume that the lump sum payout of your policy is invested at 5%. If you do not trust your dependents to invest, you can appoint trustees or chose a financial adviser and calculate his or her cost as part of the payout.

Future Obligations:

If you want to pay for your child's education, you will have to estimate the costs of those obligations and add them to the amount of coverage you want. So, in your calculations, include your yearly income, mortgage, and education costs. 

Insuring Others:

Obviously there are other people in your life who are important to you and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you. The death of an income-earning spouse creates a situation with both emotional and financial losses. In that case, you need to determine how much you'll need to insure your spouse for. This also goes for any business partners with which you have a financial relationship (for example, shared responsibility for mortgage payments on a co-owned property).

The amount of cover you require will affect the premium of your policy.  However, the most important factors that affect the price of life insurance premiums are your age, sex and any pre-existing medical conditions.

Older people will generally pay more for a life insurance policy so the earlier you take out a policy the better. Heart conditions, high blood pressure, mental illness, or a strong family history of heart disease or cancer may raise your insurance premiums. Insurance companies also offer higher rates to people who participate in "dangerous" hobbies like skydiving or scuba diving. Smokers can also expect to pay higher rates.

So, rather than putting this issue in the “too hard” basket while you are still relatively young and fit, address it now and protect your family.

At AFRM we are there to help your clients work out how much they need based on their individual situation.

Disclaimer - Information current as at 25 February 2016 - This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication. You should read the Product Disclosure Statement (PDS) before making a decision about a product.

Copyright © 2016 ClearView Financial Advice Pty Ltd, AFSL No. 331367. All rights reserved.

Contact your adviser now for a review to ensure your requirements are up-to-date. 

Please note, this information has been prepared by Australian Financial Risk Management Pty Ltd (AFRM) ABN 21 001 696 868. AFRM hold an Australian Financial Services License (AFSL) 237186. The information is for general purposes only and has been prepared without taking account of your objectives, financial situation or needs. AFRM recommends that you seek professional advice before acting on any information contained herein.
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