When we die or receive a terminal medical diagnosis, our beneficiaries (e.g. your immediate family) may receive a monetary payout that is well-suited to pay for their needs…if we have life insurance.
The problem with most of these policies, however, is underinsurance. A majority of the policies taken out by average Aussie households only cover about 60% of their needs. For households with children, it covers even less than that.
You don’t necessarily need 100% of your income covered by life insurance. In fact, KPMG offers a precise measurement. They suggest you simply replace…
- 75% of your income, and
- 9% of your superannuation.
In all, you should cover 84% of your income through life insurance for every year your dependents require financial support.
Rice Warner makes it even clearer. They state that certain individuals need roughly 10 times what you’d earn in a year for adequate insurance.
Why you should consider 10x your wage for life insurance
Funeral expenses. While it isn’t included under every life insurance policy, having funeral expenses paid for can be a massive relief during a difficult period. A basic burial costs roughly $4,500, while a cremation costs about $3,600, according to the State Library of NSW. These costs will vary considerably though, depending on you and your family’s wishes.
Paying off debts. Some of your debts may need to be paid off after you’re gone, and a life insurance payout will make quick work of them. Things like…
- credit card debt,
- personal loans, and
- subscriptions to services
…may all be things your loved ones will need assistance with paying.
Moving forward. Your family, after all the above has been addressed, may need money to continue their current quality of life. A life payout might mean your children (if you have any) can go to the right school.
According to the Australian Scholarships Group, you’re looking at roughly $61,000 to support your child through preschool to the end of high school in the public system. In the private system, the cost goes up to $381,813. Life is more than just schooling, however. There are still household bills, holidays, gifts, and no end of other costs that you can’t easily account for.
While we tend to agree with Rice Warner’s assessment, we would always tell Australians to do their own homework before deciding on a product they’ll be paying for years to come. Decide for yourself how much your family will require when you’re gone, any extra you want left for them, and then speak with a professional to determine the best course forward.
The information provided here is general only and does not consider your personal objectives, financial situation or needs. Before you decide to purchase a product, it is important to read the relevant PDS.