Have you got enough Life Insurance?

The question of, how much life insurance is enough, is frequently asked in the financial planning sector. Researchers commonly find that most Australians are “chronically under-insured”. That means that they don’t have enough cover and consequently, in the event of their death they will not only leave an emotional hole in the heart of their family, they will also leave a financial hole in their future.

Most of us have no idea how much life insurance is enough so we let someone else make the decision for us. The most common amounts covered are, firstly, to pay out loans (because the bank said it was a requirement) and secondly, the default amount provided by our superannuation funds (because we didn’t make a choice).

There is nothing wrong with that, as something is better than nothing, but really, what is the right amount?

The answer is, it all depends! Answers to the following questions will help you decide how much is right for you:

  • How much debt do you have?
  • What is it going to cost to provide for your children’s future needs (food, clothing, care and education)?
  • How much will your survivor(s) need for living costs now and into retirement?
  • Will your survivors have the means to pay for all of these things?
  • Can they do it comfortably or would a lump sum top up help?
  • What investments and superannuation savings do you already have that will help?
  • How much insurance can I afford?

When determining affordability, remember that generally, premiums get higher as you get older, so consider taking out a level premium option if you think you will need the cover for a long time. Level premiums start out more expensive, but work out cheaper over the long run. Consider splitting the policy with a level premium for long term needs and a stepped (cheaper) premium for short term needs.

Also, look at taking the insurance via superannuation. This means that you won’t have to find the cost of the premiums from your take home income, which may allow you to have a higher sum insured. Just remember that taking the premiums from your super will mean that you won’t be accumulating as much for your retirement. Another related option is to salary sacrifice extra amounts into super to cover the cost of the insurance. This effectively means that you get a tax deduction for the premiums.

Be careful using your super fund for your life insurance if the insurance proceeds are not intended to go to your spouse or dependent children. There will most likely be tax payable on the amount received by non-dependents (including adult children). Also, the Super Fund has the power to decide who gets the money, unless you have an enforceable binding death nomination in place.

Finally, and most importantly, when you commence your insurance (including joining a new super fund with default insurance), make sure that the insurance company know about any pre-existing illnesses or other circumstances that may affect your insurability. If not properly disclosed, then you may not be covered at all and your premiums will be wasted. People who short cut the application process, may think they are winning with cheaper premiums, but get a sad reality when the insurance doesn’t pay at claim time!

Of course, life insurance is only one of a handful of personal insurances. Life, total and permanent disability, income protection and critical illness insurances all fit together like fingers in a glove. It is important to review and cover your whole hand and not leave some fingers exposed.

If you want to know how much life insurance is enough for your situation or have an insurance question, give our financial planners a call on 6033 2233, or send an email to financialplanning@potts-schnelle.com.au