Let me begin with a simple question. If something happened to you, be it death or disablement, what would be the financial impact on your loved ones? Would your kids need to change schools, would the family home have to be sold? How you answer that question will have a bearing on how much cover you really need.
Before we determine how much cover is enough, lets look at some basic explanations of the most common personal insurance policies.
Life Insurance – a policy that pays a lump sum in the event that the life insured passes away.
Total & Permanent Disablement Insurance – a policy that pays a lump sum in the event that you become totally and permanently disabled based on the definition of the insurer.
Trauma (Critical Illness) Insurance – a policy that pays a lump sum on diagnosis of a particular illness.
Income Protection – a policy that pays a monthly income stream of 75% of your annual income in the event that you are unable to work.
How much do you need?
Let’s focus in on life insurance to work out how much you might need. Look at the following example:
Scenario:
Husband (Max – 45) & Wife (Emma – 44) – 3 kids (Ages 9, 7 & 5).
Mortgage – $400,000.
Max’s income is $140,000.
Emma is a stay at home Mom.
Cash – $50,000
Retirement savings of $70,000
How much is needed?
Pay out Debt – $400,000
Funeral expenses – $10,000
Replaced lost income – $60,000 p.a. for 13 years (until 5 year old reaches 18)
Less existing Cash & Retirement Savings – $120,000
Recommended Cover: $1,070,000
(inflation excluded in this example)
Naturally, our circumstances all vary, but the logic is simple. Have enough cover so your beneficiaries can pay our any debts, and have enough capital to provide a future income stream to meet their needs.
Need help to get the right cover?
At Wealth with Purpose, we have a financial planning arm, Livingstone Wealth Management that provides comprehensive financial planning advice. If you need help with your insurance, then get in touch and we’ll make a time to connect with you. Just complete a few details on this form, and we’ll be in touch.