Knowing how much life insurance you need is essential to make sure your loved ones are taken care of.
The saying used to be that the amount of life insurance you choose to be insured for should be 10 times your income. However, we work with a smarter approach which is to calculate how much money your dependents would need to maintain their quality of life due to the loss of income in the event of your death.
Usually that means taking out enough insurance to pay off your debt and leave an investment fund for your family.
Calculate your needs
A study by Massey University researcher Natalie Wang found some people left behind after a death were unable to manage financially, and either needed benefits to survive or suffered a drop in their standard of living. Some lost their homes because they were unable to keep up the payments.
To calculate your life insurance needs, ask yourself the following questions:
- What are your financial obligations? How much would you need to pay off your mortgage?
- Do you have any other debt, such as credit cards, personal loans or hire purchase agreements?
- Would you like your family to have an ongoing income if you died? Would you like to pay for your children's education? This might include school fees, school uniforms, sports kit and university tuition fees.
- Would you like to leave money to pay off your funeral expenses? According to the Citizens Advice Bureau, the average funeral now costs $8800.
Most people choose to insure all the outstanding debt on their mortgage, but some cover less if they want to cut down the size of their premiums, or if their surviving partner has enough income or savings to make the payments without help.
In order to provide for children, people often start with a replacement income - the amount they'd need to replace their salary. If you earn $60,000 a year, for example, you could choose to include this amount in the lump sum you're insured for, multiplied by the number of years you'd like to have it paid out (perhaps until your child turns 18).
You can compare life insurance quotes to figure out exactly how much cover your family would need, and see how much cover other people apply for on average.
Schedule in regular reviews
You should be reviewing your policy when your circumstances change. If you get married, have kids, buy a house, or retire, you should check to see if you need to increase your reduce the amount you're insured for. Forgetting to update your life insurance policy is risky and can leave you with too much or too little insurance.
Once you've decided how much life insurance coverage you need, we'll make it easy by comparing a range of policies and prices from a range of New Zealand's leading insurance companies. The service we offer is independent, transparent and free, and you're guaranteed the lowest price on the market.
It's easy to review your policy with your MyLifeDirect personal online insurance portal that's free to all LifeDirect customers. You'll be able to view all your policies, make changes or make a claim. Otherwise you can fill out a contact form online or give us a call on 0800 800 400 to chat with our Wellington based team.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.