How Much Cover
The decision to take out life insurance cover is a fairly simple one, but deciding on the amount of life cover is less straight forward.
For most people the overall objective of life insurance is to maintain standards of living for their dependents after their death.
As a rule of thumb, the loss of a partner will result in a fall of approximately 30% in the expenditure of a family. You should be looking at cover of about five to ten times your annual salary.
However, everyone’s circumstances and requirements differ so it may be more prudent to take a more scientific approach. You need to consider what costs need to be covered by the payout of your life insurance. Some areas you may want to consider are listed below.
(This is not an exhaustive list; you need to analyse your own lifestyle and requirements.)
- Paying off a mortgage
- Paying off loans and other debts
- Family income needs
- Emergency funds
- Family education costs
- Estate costs
- Possible inheritance tax
Of course, you also need to ensure that you can afford to pay the insurance premiums.
With the above expenses in mind, our life insurance calculator will help you calculate the amount of cover you require.
Another area for consideration is inflation. $100,000 now will be worth less in ten years time, so you may want to increase your life cover to take inflation into account.
An alternative approach would be to calculate your life cover requirements without taking inflation into account, and then review the cover amount periodically, perhaps every three or five years. A word of warning; this latter approach relies on you remembering to review your policy regularly. If you forget, your life cover may not be adequate. In addition, you lose the benefit of being able to establish guaranteed premiums for the life of the policy.