When it comes to working out how much life insurance you need it’s important to make sure you cover all your bases – not just the mortgage! You need to think about all the debt you have, how much your kids will need and most importantly – the income lost.
Pay off the mortgage and any debt
Having enough money to pay off the mortgage is the most common factor used to determine the amount of life insurance cover. While it’s important to cover the mortgage – it’s more important that all of your financial outgoings are factored in. So in the event a claim needs to be made – those left behind don’t have to dip into the precious mortgage fund to pay off other debts like credit cards or items on hire purchase. You also need to factor in the cost of a funeral which can be in the region of $20,000.
Leave enough for the kids
Raising children in New Zealand is not a cheap endeavour. If you’ve got kids and you want them to have financial stability should anything happen to you – the right amount of cover is critical. As a conservative estimate, I recommend people insure each child for $250,000. The amount of cover will, of course, depend on the age of the child and your circumstances but you’ll want to consider food, clothes, any special medical requirements and education (extracurricular activities, school fees and university or training). You may also want to consider insuring yourself for a higher amount while you’re establishing your career and have children at home. Then reduce the cover when your kids get older, or you’re in a more stable position financially.
Cover the loss of income
I believe your earning potential is your biggest asset – not your home. If someone earns $100,000 and they die at 30 – the lost potential income for their lifetime is in the millions.
Insuring your mortgage and your family are perhaps more obvious than covering loss of income. Unfortunately taking income into account is often overlooked when it comes to working out the amount of life cover needed – particularly by the banks. However losing one or both incomes can be financially devastating to those left behind. Some people just get life insurance to cover off the mortgage. They don’t take into account the fact that the parent left behind will need to take time off work to grieve and support their children. They also may need to go from full-time employment to part-time. If the life insurance only covers the mortgage, they will probably have to dip into that money for financial support.
A simple formula to work out your life cover
• Cover mortgage and any debt
• Cover funeral costs – approximately $20,000
• Cover your children at $250,000 each
• Cover five years of lost income for each spouse
If you have life insurance it’s important to make sure the amount you’re being insured for reflects your lifestyle. Life moves so fast and circumstances change, so it’s also really important to get your cover reviewed every twelve to eighteen months.
Mike Broadbent is the director of Evergreen Life www.evergreenlife.nz.
Get in touch with him on 0800 577 366.
Read more of Mike’s columns here.