Life Insurance: How Much Is Too Much… or Not Enough?

As you’ll probably know, life insurance is designed to pay a lump sum on the death of the insured person (or most policies contained a terminal illness benefit and potentially other add ons/features).

The purpose, of course, is to allow your loved ones to maintain their lifestyle once you’re no longer there to support them.

So how much would your family need? Here are some key tips to get you started.

Consider your priority needs

When estimating what level of cover you need, it’s important to keep your financial circumstances front of mind. For example:

Do you have any debt?

Usually paying off debt is the priority, as this can relieve a lot of financial stress on those that are dependent on you (typically your family) if you were to suddenly disappear, or be diagnosed as terminally ill and were to stop work.

Would your family be able to cover funeral costs?

Funerals can be a costly business, and not having enough money to cope with this sudden expense can add to an already stressful time. Most policies, fortunately, will pay an advance amount of the total life insurance upon the death certificate being presented to speed up the funds being available to deal with this cost.

Do you have young kids?

If the remaining partner intends to keep working, you may need someone to help clean the house or care for your kids, while the family settles into a new routine. Don’t also assume that your loved significant other will be able to continue working immediately, and allowing for this in your calculations now is prudent.

Think about your income

If you’re working out how much cover you need, think about the income that will be lost and what that is paying for. For example, if you have a mortgage for $400,000 and earn $60,000 per year… is a million-dollar Life Insurance policy too much? And how much replacement income would your family actually need, once there were no mortgage repayments left to pay? This is an important factor also in not over-insuring. That’s right, an insurance adviser advising not to over-insure.

If the mortgage/debt is gone, that is typically a huge chunk of your current total yearly expense. This expense could be deducted from the total calculation of what life insurance is needed, based on the lost income scenario for a certain number of years. The key always comes down to planning for the real and relevant risks, and structuring your policy to cover these.

The plan should be designed so it does respond the intended way, or why bother paying for it? That would be like buying an insurance policy on your home that covers half of the rebuild value, and hoping it covers the total build when the reality is it never was going to happen. It’s just poor planning.

But what if the premium costs are too high? If they are or in the future become too high, you can consider revising how much risk you can tolerate and an ideal plan could become a decent plan. It’s better to revise than cancel. The risk doesn’t suddenly disappear. It’s about having trust in your adviser to be there for you and help you work through what options exist, where cutbacks may be most appropriate and how the future plan could be modified.

Getting overwhelmed with insurance is believe it or not, normal. I am here to help.

Weighing up all factors

In the end, to avoid being over or under-insured, your decision needs to weigh up the premium cost versus what you really need. As always, don’t forget I’m in your corner and can help you find the right level of coverage and insurer for you, and your family.

The opinions expressed in this article should not be taken as financial advice or a recommendation for any financial product. Rod Schubert Financial Advice (RSFA) shall not be liable or responsible for any information, omissions, or errors present. Any commentary provided are the personal views of the author and are not necessarily representative of the views and opinions of Rod Schubert Financial Advice. We recommend seeking professional legal and/or lending advice before taking any action.

Rod Schubert

My favourite part of being in finance the satisfaction of knowing our clients are in a better position than when they first approached us.

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