How much Life Insurance cover do you need?
As a Financial Adviser, I discovered that the vast majority of New Zealanders were underinsured, often substantially, leaving their families exposed to considerable hardship in the event that they passed away or became sick and disabled.
In this post I want to explore how much life insurance cover you need in order to adequately protect your family in the event of you passing away, by giving you a sound basis on which to determine the right level of cover.
Let’s look at a real world application of a relatively typical couple – Max & Emma.
Assumptions:
- Husband (Max – 45) & Wife (Emma – 44) – 3 kids (Ages 9, 7 & 5.
- They have a mortgage of $400,000
- Max’s income is $140,000. Assume Emma is a stay at home Mum at present.
- Cash in the bank – $50,000
- Max’s Retirement savings of $70,000
- Emma’s Retirement savings of $25,000
Let’s determine what cover they’d need in the event Max died:
- Repay their Debt – $400,000
- Funeral – $10,000
- Living Expenses – $60,000 p.a. for 13 years (until the 5 year old reaches 18) – therefore capital needed of $780,000. (This assumes no inflation and no investment return on the capital)
- Less Cash – $50,000
- Less Max’s Retirement Savings of $70,000 (available only on his death)
Therefore:
Debt ($400,000) + Funeral ($10,000) + Living Expenses ($780,000) Less existing Cash ($50,000) & Retirement Savings ($70,000)
= Recommended Cover: $1,070,000
Note: inflation & investment returns excluded in this example. Generally you would assume that an investment return would be made on the capital from the insurance lump sum (meaning you would need less sum insured as it would grow). You would also assume that inflation would have a negative impact on the lump sum (meaning you would require more to allow to allow for the decline in the purchasing power of the lump sum over time).
Important Disclaimer: This article is not intended to be personal financial advice. Before entering into an insurance contract we suggest seeking advice from a licensed financial adviser. Alex Cook, Author