Life Insurance – What is it, and how much is enough?
Do you know what types of life insurance you already have – and how much you may need, if any?
According to a recent study by research firm Rice Warner, the average level of life insurance Australians have is around half the amount they need to be financially secure.[1] So that means many Australians may be underinsured compared to their expected level.
That’s why it’s important to understand if you need life insurance, what your life insurance covers you for and whether it’s enough to meet your needs. Only once you know that answer, can you decide whether you need to add or change the types of cover you have, or increase/decrease the amount you’re insured for.
Understanding your cover
Depending on your situation, you may have automatically received insurance cover when you joined your super fund. You may also have added optional types of covers or adjusted your level of cover.
Here are the different kinds of insurance you may have:
- Life cover: pays a lump sum if you die, or become terminally ill
- Total and Permanent Disability cover (TPD): pays a lump sum if you are permanently unable to work due to disability from an illness or accident
- Income Protection: provides monthly payments if you get sick or injured and are unable to work.
To see which types of insurance you have through your super and how much you’re covered for, check your most recent superannuation account statement. This is just an extra reason to be checking your Super once a month.
How much cover is enough?
The type and amount of cover you need depends very much on your individual situation. You should consider these and take your own advice.
Generally, you’re likely to need cover if you have:
- a partner, children or other loved ones who depend on you financially
- a mortgage or other major debts, like a car loan
- regular financial obligations, like school fees or rent
You may need less cover if you have:
- a financial safety net, like savings or investments
- other people in your household bringing in an income and who could continue working if you couldn’t, or if you were no longer there
As a rule of thumb, Rice Warner’s Underinsurance in Australia 2017 report estimates that 30-year-old parents with children need:
- Death cover equal to eight times the annual household income
- TPD cover equal to four times the annual household income
- Income Protection cover equal to 75% of the monthly household income.
ASIC’s Moneysmart website also has a useful insurance calculator to help you work out how much cover you might need.
Of course, as your life changes, your insurance needs will too. So it’s important to review your cover regularly. Set a date in the calendar, and try to check once a year.
Remember, insurance always seems like a sunk cost, until the day that you need it. Then it may seem much more affordable 🙂
[1] Rice Warner, Underinsurance in Australia, 2017.
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