How to estimate your life insurance needs

If you're the main breadwinner of the family, the thought of what might happen to your family, if you pass away or are unable to work, has probably kept you up some nights with worry. 

Fortunately in this case, peace of mind can be purchased in the form of life insurance. 

Life insurance is a safety net for your family that can ensure a financially secure future if anything happens to you. It leaves your loved ones with a tax-free lump sum payment to help cover the costs of day to day living and any debts you leave behind, like the mortgage on the family home. 

A well-chosen life insurance plan can help minimise the financial impact on your family if tragedy should strike. It's not pretty, but it's practical and will help you sleep better at night. 

How much life insurance should I take out? 

With life insurance, you can choose the benefit amount based on your family needs. Obviously your choice will impact the cost of your policy, as the higher the benefit, the higher your premium will be. There are two main considerations in calculating adequate cover to take care of your loved ones when you can no longer do so: 

  1. day-to-day living costs, and 
  2. long term debts.

It's important to sit down and do your sums, because although a figure like half a million dollars may sound like a lot of money, if you have an outstanding mortgage and several young children, you could easily find that it isn't enough at all. 

The following sections set out some key aspects to consider in determining your amount of cover but it is not an exhaustive list of matters to consider. If you wish to obtain information that is more particular to your circumstances or if you have considerations that are out of the ordinary, such as a disabled dependant in your family, you should consider obtaining independent financial advice. 

Day-to-day living costs 

To work out your family's monthly living costs, you need to factor in things like: 

  • rent and other bills, like utilities
  • groceries
  • petrol and other transport costs
  • clothing and toiletries
  • education costs
  • medical and dental costs
  • other forms of insurance such as health insurance, home insurance and car insurance
  • holiday and other entertainment costs
  • allocation for long term costs such as house maintenance, upgrading vehicles, etc

Tally the monthly amount that you would normally allocate to these costs for your family. From this figure, you can minus any household income the family can expect to continue to receive after you die. For example, any income from investments or your partner's earnings. 

Once you've worked out a net monthly figure, calculate an annual figure and then multiply that by the number of years you want to cover your family. For example, you might want to cover your family until your youngest child turns 18. 

Long term debts 

The second consideration in calculating life insurance is the amount of your long term debts. These include things like the mortgage, credit cards, and any other debts like car or personal loans. Remember these debts don't die with you, so it is generally wise to factor enough in your life insurance benefit to clear these amounts and leave your family with a clean slate. 

Life insurance calculators 

If maths isn't your strong point, a life insurance calculator could help you figure out how much insurance you may need. 

Apply for cover now! 

If you think life insurance is right for you, there's no need to wait, apply today. Compare life insurance quotes today by requesting for a range of free quotes online or calling Choosi on 13 55 55. 

These articles are provided as reference material to allow more informed decision making, but are not intended as being a complete source of information on any topic. All readers should make their own independent analysis on the topic to make sure they have considered the aspects that are important to them.