Are you confused about life insurance? Have you asked yourself questions like this? Do I really need it, how much is enough, shouldn’t I just have faith that God will provide for my family when I die?

It is my firm belief that God has provided humans with a really practical solution for providing for our family’s when we die. Life insurance replaces me economically when I’m gone. It ensures that my family doesn’t end up on the streets and being the recipients of charity.

So how much life insurance is enough? Well you certainly don’t want so much that this might give your family an incentive to knock you off!

A good rule of thumb is 10 times your income. So if you’re earning $60,000 – then $600,000 might be about right. However this is such an important aspect to your family’s protection a little more science is needed.

What to cover

In my financial planning practice, we help clients calculate what is right for them. This includes provisions for mortgage and debt repayment. If you create the debt, then I think it should die with you – sound fair?

1. So the first thing is to leave the family debt free.
2. Next on the list is to provide for funeral costs. An amount of $10 to $15,000 should cover this. After the funeral fund, then it’s important to replace some of the income that will be lost on death. Calculate how much income the family needs on an ongoing basis assuming the mortgage and debts are all gone.
3. Don’t forget to make an allowance for the stay-at-home mum or dad. There is definitely an economic loss should they pass away, and this need to be included in the calculation.
4. Finally it is important to consider adding some funds for education funding. Are there young children that will require funds to be set aside for higher education and university? If so, make provisions for this too

Practical example

My wife Rachelle works part-time in the workforce and full time at home. I have enough insurance on Rachelle to ensure that I have options on how we’ll replace the duties she performs – should she pass away prematurely. This is enough money for me to either work less or pay someone to do some of the duties at home she currently performs.

Let’s say you needed to replace $50,000 per year of lost income. The next question is how long is this extra income needed for? At Milestone we recommend until your youngest child is either 18, 21 or 25. One this time frame is established multiply the amount of income needed by the time frame.

So if you needed $50,000 per year for 11 years this means you would need $550,000 cover.

Add up all these amounts and you’ll have the right amount. Round up a little if you like even numbers, as life insurance is relatively cheap and having a little too much is better than not enough.

Where to hold your life insurance

Now that you know how much insurance you require you need to decide where to hold it. Do you hold it and personally own it or have it held within superannuation.

In short, for most the best place to hold cover is in their superannuation as it provides taxation benefits.

For a life insurance calculation worksheet click here.

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