How Much Life Insurance Do I Need?
Will your family be able to support themselves if you go too soon? It's not a nice hypothetical to consider, but it's a critically important one, as no one wants to leave their loved ones in the lurch if the worst were to occur.
Life insurance can offer you and your family much-needed security in such a situation and should be seen as a must-have for everyone, but particularly if you have financial dependents.
If you've committed to securing a life insurance policy, the question becomes "Exactly how much life insurance do I need?" In this guide, we'll help you answer exactly that.
Factors to consider
Several factors can influence the amount of life insurance you might need. When shopping for your perfect policy, consider the following:
Annual income
You and your family are probably used to a certain standard of living, which will be largely determined by your level of income. Your annual earnings should therefore form a key consideration in the level of coverage afforded by your life insurance policy.
Living expenses
As important as what you earn is what you spend. Divide your living expenses into necessary and discretionary spending to get a clearer idea of what you need to get by, then use the necessary spending as the baseline when calculating the value of your life insurance policy.
Debt obligations
Take into account any money that you owe, like credit card debt, personal loans and your mortgage. You should aim to avoid lumping your loved ones with debt in any form, particularly if that debt is yours and yours alone. A level of life insurance that completely repays all your debts is a good baseline to aim for.
Education expenses
If you have children, you might consider setting your life insurance at a level that allows you to put them through school and tertiary education.
Funeral costs
You should certainly aim to cover the costs of your send-off, as the last thing your grieving loved ones need is an expensive bill.
Financial goals
What are your partner's and your family's financial goals? They might be smaller and shorter-term, like going on holiday, or they might be larger and longer-term, like buying a home. Helping your loved ones to achieve those goals can be a magnificent final act, so it may be worth taking out a level of life insurance that offers the necessary financial assistance.
Common methods of calculation
Now that we know a few of the factors that we should consider when setting the value of our life insurance policy, how exactly do we go about calculating the precise number? A few common methods include:
Income multiplier
One quite simple rule of thumb is to take your current annual income, then multiply it by a certain number to get a total value for your life insurance policy. The multipliers vary with age, for a couple of reasons: the older you get the more you earn, and the number of financial dependents you have can fluctuate with age.
As a very general guide, those younger than 50 should use a multiple of 10-12x, while those older than 50 may be able to reduce that to 6-8x.
Needs analysis
A needs analysis represents a more detailed and planned approach to life insurance. It calculates a precise figure for the value of your life insurance policy by considering the necessary expenses that you and your dependents will need to cover if your policy comes into effect: money to cover burial expenses, outstanding debts, and the living expenses for dependents over a given amount of time.
Human life value
Human life value (HLV) refers to your monetary value, in terms of your income and the financial impact you have on your dependents. The goal is to ensure that your family or dependents enjoy financial stability if you pass. This calculation factors in:
- Current and future earnings: The potential income that you would've earned over your working life.
- Financial obligations: Debts, education expenses and other responsibilities.
- Savings and assets: Wealth that would be passed on to dependents.
A simple way to calculate your life insurance needs
If you're looking for an easy way to ensure that you have appropriate life insurance coverage, simply follow these steps:
- Estimate your portion of your family's annual living expenses and multiply by the number of years you want to provide support.
- Add any outstanding debts, including your mortgage and personal loans.
- Include future education expenses for your children.
- Factor in funeral costs and any other final expenses.
- Subtract any existing savings and life insurance coverage you already have.
The final number will be enough to ensure that your family continues to live comfortably for however many years you nominated in step one.
Determining how much life insurance you need involves careful consideration of various factors and methods of calculation. By understanding your financial obligations & goals, you can ensure that your loved ones are financially secure in the event of your death.
AMP: Helping to protect your loved ones when they need it most
At AMP we're proud to offer the most secure and flexible life insurance - the type that ensures your family and dependents enjoy financial security if you ever pass away. Get in touch with our experts today to learn more about our personalised life insurance options.
FAQs
While you hope you'll never need it, life insurance is one of the most critical investments for anyone who has a family or dependents, as it ensures those loved ones are supported financially when you are no longer around to support them yourself.
Life insurance premiums are decided by more than just the total value of the policy - the type of life insurance, provider, policyholder age and risk factors, and plenty of other considerations are made.
Life insurance is inherently bespoke, so more important than monthly premiums is securing a policy that works for you. Get in touch with our friendly team to secure your bespoke quote today.
The downside of life insurance primarily lies in its cost. While it provides valuable financial protection for loved ones, it requires ongoing premium payments. These payments can be significant, especially for older individuals or those with pre-existing health conditions.
The information in this blog is of a general nature and does not constitute financial or other professional advice. Policy limits and exclusions apply - refer to your policy wording for full terms and conditions.