How much life insurance is enough?
Australians enjoy access to a strong safety net, with universal healthcare and the new Disability Support Scheme. But will this be enough to protect your family’s standard of living if you or your partner die or become too ill to work? The answer is almost certainly no.
Life insurance is designed to bridge the financial gap in difficult times. Yet even those of us who do have life insurance often don’t have enough.
Not so super
First, the good news though. If you’re a member of a super fund you probably have life insurance, total and permanent disability (TPD) insurance and possibly income protection insurance. Trauma cover can only be purchased outside super.
Super funds are able to negotiate group rates so insurance premiums are often lower. Premiums are deducted from your super account balance, not your bank account, which also helps when your budget is tight.
The not so good news is that the payout in the event of a successful claim is typically limited. According to a recent report by Rice Warneri the typical default cover offered inside super meets only about 30 per cent of the basic life insurance needs of a family with children.
As a general rule of thumb, Rice Warner estimates that a couple with children needs life insurance cover of 10-15 times the higher earning partner’s annual income to ensure the family can maintain its standard of living if the main breadwinner passes away.
Given the average full-time job in Australia pays $78,000, that translates to a payout of $780,000 - $1,170,000. Yet the payout from life insurance held inside super is generally closer to $100,000 - $200,000.ii
So how much cover do I need?
Of course, individual circumstances vary. A twenty year old without dependents requires a lower level of cover than a middle-aged parent with a $400,000 mortgage.
We can assist you to work out how much life insurance you and your family may need. Essentially, it comes down to subtracting your debts from your assets then determining how much money will be required to cover the ongoing outgoings. Think home loan payments, school fees, groceries, utilities, vehicle expenses and so on.
For example, if it’s going to take a decade for your children to be self-sufficient and your current annual household outgoings amount to $80,000, you should aim for at least $800,000 of cover.
His and hers policies
If it’s unusual in Australia for the main income earner in a family to have adequate life insurance, it’s downright rare for the parent working part-time or not at all to have it. That person typically provides unpaid labour in the form of childcare, cleaning, shopping and meal preparation.
If the low or no-earning partner is no longer around or incapacitated in some way, their partner will most likely either have to take on those added responsibilities or pay someone to do so. So it’s worth making sure both parents have adequate cover.
Purchasing peace of mind
It’s human nature not to want to dwell on worst-case scenarios. Nonetheless, it’s unfortunately all too common for people in the prime of their lives to pass away or suffer an illness or injury that prevents them from earning an income.
There’s nothing you can do to guarantee that won’t happen to you or your partner. But there is something you can do to make sure you or your loved ones won’t experience financial distress if misfortune strikes.
So start by investigating how much and what type of life insurance your super fund currently provides. If you find that it falls short of your needs, you might consider topping it up by purchasing additional cover outside super.
i ‘Addressing superanuation underinsurance’, 28 April 2016, Rice Warner, www.ricewarner.com/addressingsuperannuation- underinsurance/
ii ‘Life insurance – inside and outside of superannuation’, Canstar, 17 February 2015, www.canstar.com.au/superannuation/life-insurance/