Australians are among the wealthiest people in the world; we also have one of the highest levels of underinsurance. While many of us have some life insurance, chances are we don’t have enough.
When you are part of a couple, with children or a baby on the way, a mortgage, a car loan and other ongoing financial commitments, you’re probably so busy working for today you don’t have time to think about tomorrow.
But what would happen if you or your partner were to die prematurely or be permanently disabled? How would the ones left behind cope financially?
That’s where life insurance can make a real difference to your family’s future wellbeing. Losing a partner is an emotionally traumatic experience, but imagine how much more difficult it would be if your family had to worry about how to pay the bills.
Securing more than the basics
At a bare minimum, life insurance can help cover your family’s living expenses and debts. But if your budget allows it, you probably want more than the basics for your family.
What if they were forced to sell the family home and move to a cheaper neighbourhood, or your children had to forgo the education you and your partner planned for them?
Luckily, it doesn’t need to come to that. With adequate protection, your family’s current and future standard of living are secure.
The key word here is ‘adequate’. Unfortunately, Australia is one of the most underinsured nations in the developed world.
According to the 2013 Rice Warner Underinsurance Report, the median level of life insurance cover across the working age population is 64 per cent of basic life insurance needs, but only 42 per cent of the amount needed to fully maintain a family’s standard of living.
The picture is even worse for total and permanent disablement (TPD) insurance where the median level of cover is just 14 per cent of the amount needed. And if you or your partner were permanently unable to work, you would not only need to cover regular expenses but the additional cost of medical care.
The need for life insurance changes over the years as you move through different stages of life and family formation. In the middle years, as your family grows, you generally have more to protect. Once the kids leave the nest, you may be able to think about reducing your cover.
The point is, life insurance is not something you take out once then put in a drawer and forget. Whenever your family or financial circumstances change, you need to review your insurance needs to make sure you are protected.
So how much life insurance do you need? And if you already have cover, how do you know if you are underinsured?
As a general rule of thumb, Rice Warner estimates that the average Australian couple aged 40 with two children needs roughly 10 times their average annual earnings simply to repay their debts and maintain a basic standard of living. In order to maintain your family’s current lifestyle in full, you need the equivalent of 15 years income.
These estimates are only useful as a starting point to get you thinking. To help work out how much your family would need to protect their lifestyle without you or your partner there to help, try this exercise:
- Work out your family’s annual living expenses, and multiply this figure by the number of years they will be dependent on your income. Don’t forget items such as the children’s education.
- Add debts that need to be repaid such as your mortgage, credit cards and car loans.
- Add the cost of additional services that may be required to support your partner if they are left to cope on their own. Childcare, lawn-mowing and other household tasks may need to be outsourced.
- Subtract any wages, social security payments or investment income your partner is likely to earn, even with their additional responsibilities.
- Subtract any savings, investments, superannuation or existing insurance policies that can be readily cashed in.
The figure you’re left with is the approximate lump sum needed to ensure that your family continues to enjoy their normal lifestyle if anything happens to you. Chances are, insurance is the only way to bridge the gap between your family’s future needs and their existing financial resources.