You’re about to hit send on your application for life insurance – but are you sure you have the right level of cover?
Everyone’s protection needs are different, so it’s best to speak to your financial adviser first. They can make a personalised assessment of your individual circumstances, considering your debts, assets, income and family situation, then help choose the right policy for you.
Here are three important questions you may wish to ask yourself before assessing how much protection you’ll need for your lifestyle and loved ones.
1. How much do I need to cover debts and large expenses?
While you’re working, you can use your income to keep up with debt repayments, such as your mortgage, credit card and personal loans. But it’s worth considering how much you or your family would need to take care of your debt obligations if you were no longer able to cover them.
The last thing you want is to default on a loan or leave your family under financial pressure. That can have a long-term financial impact, turning a distressing event into a permanent setback.
For example, imagine the case of Sam and Kari, who are in their 30s and newly married. They’ve recently bought their first home together, and now have a home loan worth $700,000. The couple know it’s a good idea to take out life insurance while they’re still relatively young. This will make sure their home and lifestyle are protected if something were to happen to either one of them.
Working with their financial adviser, Sam and Kari both get life insurance and TPD cover worth $900,000. This will be enough to pay off their home loan and other debts, with an additional buffer to compensate for a period of lost income.
They also take out income protection insurance worth 70% of each of their salaries. This is to ensure they can continue to pay down their mortgage and cover living expenses even if they’re unable to work due to illness or injury in the future.
2. How much would my family need to maintain their lifestyle?
If you and your family rely on your income, it’s important to consider how they would get by without that income – either temporarily or permanently. So when you’re choosing insurance, you’ll should consider budgeting for everyday living costs such as bills, groceries and school fees, as well as the potential costs of recovering from an accident or illness.
Here’s an example. Debra and Harry are a married couple with two children under five years old. Harry works in construction, while Debra teaches part-time and cares for their kids. They’re also paying off a $600,000 mortgage.
After buying their home, Debra and Harry speak to their financial adviser about taking out life insurance to ensure the future financial security of their children. They get life cover worth $1.2 million – which is enough to maintain the lifestyle of a family of four for at least six years, including the costs of education.
Because Harry works in a high-risk job and is the main income earner, he decides to get $1.5 million in TPD cover too, as well as income protection worth 70% of his monthly salary. He and Debra also take out trauma cover policies. As Debra is the primary caregiver, this will allow Harry to take unpaid leave from work if something were to happen to her.
With this protection in place, the couple have peace of mind knowing their children will continue to enjoy the life they’ve worked hard to build for them, no matter what happens.
3. Do I have any savings or leave to fall back on?
How quickly would you need financial support if you were unable to work for a while due to an injury or illness? If you’re currently working full-time, you may have access to sick leave or annual leave, in addition to any savings you’ve built up. But if you’re a casual worker or self-employed, or if you don’t have much in the bank, then you’ll likely need a greater financial safety net in case something goes wrong.
Let’s use Manu as an example. He’s a 27-year-old freelance graphic designer with an income of $90,000 per year. He lives alone in a rented apartment which doubles as his home office. Manu has a credit card and a car loan but no other major debts. He’s also saving for a home loan deposit.
While Manu has basic total and permanent disability (TPD) cover through his super fund, he’s self-employed so can’t rely on annual or sick leave to help cover any absence from work. And he knows that if he taps into his savings, it will be a major setback in his plan to buy a home.
So, with the help of his financial adviser, Manu decides to take out income protection cover worth 70% of his salary – or $5,250 a month. This would be enough for him to live comfortably until he’s able to start working again.