21 Nov 2019
When it comes to calculating how much Life Insurance you need, it’s easy to get overwhelmed. In actual fact, there’s no complicated maths formulas involved - simply assess your current debts, consider end-of-life expenses and predict what ongoing income your dependents would need to maintain their lifestyle, if you weren’t around.
So, if you find yourself asking "how much Life Insurance should I buy?" and aren’t sure where to start, we’ve got you covered. In this section we’ll look at how your situation may affect the cover type and level of Life Insurance you need, allowing you to find a policy that fits you.
First things first, ask yourself:
Do I need Life Insurance at all?
If there are people in your life who depend on your income, or debts that your family would need to continue to pay once you’re gone - whether that’s your kids, a significant other, aging parents or the wider whanau - then a Life Insurance policy could be a wise option for you.
It’s usually a big life change that prompts us to consider Life Insurance, such as buying a house, having your first child, starting a business or getting married. After all, if you were no longer around, how would your dependents look after the mortgage, schooling, business loans or other debt?
Life insurance offers protection for your family and other people who depend on you financially.
Which type of Life Insurance should I get?
Before you start crunching the numbers, you’ll need to consider how long you want your insurance policy to last and how much you can afford to put towards your premiums.
At Cigna, we offer Term Life Insurance policies, which gives you the flexibility to buy suitable levels of coverage when the need for protection is the greatest. For example, when you first purchase a house with your partner, the need for Life Insurance is higher, compared with when you’ve paid off the mortgage (therefore minimising the level of debt your partner is left with, if you were to pass away unexpectedly). This means you can scale your cover up and down as your life changes.
So, what is Term Life Insurance?
As the name suggests, term insurance provides protection for a specific period of time, most commonly a year. During this time, your premium rate stays the same. At Cigna, your policy automatically renews every year. Unless you actively change the insured sum, your premiums shouldn’t change dramatically. However, to account for inflation, we apply an indexation increase and will make any necessary risk adjustments based on age.
At the end of each term, the policyholder has a chance to review the policy and decide whether or not to commit to another term. If you continually renew your policy, your premiums will stay the same, even if your health changes (aside from the factors mentioned above). Alternatively, if you no longer require Life Insurance, you can cancel your term policy. If you decide to buy another term policy at a later date, your premiums will be recalculated and may be higher.
How much Life Insurance can I afford?
It’s important to consider how much you can afford to pay in premiums - which can be paid fortnightly, monthly, bi-annually or annually. A higher coverage amount means a higher premium. However, if you lock in Term Life Insurance while you’re young and healthy, you’ll enjoy lower premiums over the course of your policy - a handy hack for the budget conscious!
Finally, how much insurance do you need?
As a rule of thumb, adequate coverage comes down to a ‘needs-based analysis.’ Start by taking stock of everything you pay for, or would need to pay for in the future.
- How much do I owe? Consider your mortgage, business loans, outstanding credit card debt or student loans. An insurance pay out will relieve your loved ones of any stressful financial obligations, should you pass away unexpectedly.
- What one off, end-of-life costs would I incur? Estimate funeral, medical and legal costs here.
- How much ongoing income will my family need to maintain their lifestyle? How many years would my income be needed for? There’s no exact art to predicting the future, but it pays to consider:
- whether your partner currently works or is able to work in your absence, and their estimated income level
- whether your spouse will remarry
- whether or not your children will go to university or need additional financial support
- how dependent your partner’s retirement security is on your future income and consequent savings
Let’s dive into this at a deeper level:
Five financial considerations that impact insurance cover:
What do I owe: outstanding debts
If you pass away unexpectedly with unpaid debt tied to your name, your next of kin may be on the hook for all or part of it. So, if you’ve cosigned a loan with a partner, such as a mortgage, factor this into your Life Insurance cover.
You’ll want to leave enough for your loved ones to cover your loan repayments, particularly if your loans are secured by collateral your dependents rely on, like the family car or home.
What do I expect to pay: end-of-life expenses
One of the hardest parts of life is dealing with the death of a loved one. On top of this, the grieving family are often left to manage end-of life medical expenses and funeral costs. It’s hard to make difficult financial decisions under stressful circumstances. Life Insurance can prevent this added pressure.
According to Citizens Advice Bureau, the average funeral cost can easily range between $8,000 and $10,000, with most of it having to be paid immediately. Some of the basic necessities to cover include newspaper notices, burial plot or cremation fees, hearse costs, celebrant fees and venue hire of a church or a funeral home.
If you suffered from an illness requiring a lot of care, medical bills can stack up, including payment for care services such as nursing homes.
Many policyholders work these final expenses into their coverage. At Cigna, our Life Insurance policies come with a built-in funeral benefit so your family can have immediate access to anything between $5,000 and $15,000, depending on which policy and cover level you choose.
Who do I need to look after: dependents
The most common trigger for Life Insurance is having a child. As a parent, we tend to worry, a lot. And with good reason - whether you’re worried about why your toddler is being suspiciously quiet in the next room, or if your five-year old will make friends with their classmates, sleepless nights are an inevitable part of parenting. Life Insurance gives you peace of mind that your little ones will be looked after, if you were no longer around.
If you have children or other dependent relatives who rely on your income, such as aging parents, siblings or non-biological children, expect to increase your Life Insurance cover by several hundred thousand dollars. This amount could cover the long-term care you already provide for your dependents. Before you make any decisions to increase your Life Cover, give our team a call to see how these changes would impact your premium. Our team works with you to determine the right cover for your situation.
What do I need to forecast: education costs
If you have kids, allow for tertiary education expenses in your Life Insurance cover. As parents, we want what’s best for our tamariki. Education can provide upward mobility and a whole host of opportunities to enrich our children’s lives. A Life Insurance payout can contribute to student loans, private schooling or university accommodation costs.
What do I need to forecast: financial safety net
A significant amount of Kiwis are underinsured - which indicates that a “she’ll be right” guesstimate of your cover requirements won’t suffice.
When calculating your cover, take stock of what you provide for your family. Consider all your regular outgoings - from the necessities like food and medical bills, to discretionary costs that improve your loved ones’ quality of life, such as family holidays.
To track your outgoings, use an online budgeting tool like Sorted. Once you’ve got an accurate picture of your monthly bills and non-negotiable expenses, estimate how much you save per month. Consider your long-term savings goals here - how much money do you need to retire? How much will you need for the immediate future?
This should give you a better idea of the regular income your loved ones would need - Life Insurance is a financial safety net that acts as an income replacement, so calculate your cover needs carefully. This ensures that your loved ones do not get caught short, or are unable to maintain their current lifestyle.
How does my situation change what I need?
While it might be easier for everyone to take out the same policy, depending on your situation that might not actually be in your best interests.
It all comes down to your current life priorities, which vary between different people. For those who are single, Life Insurance might be a way to cover funeral costs, whereas for married couples, a policy will help cover the needs of your partner. Likewise if you have children - it doesn’t make sense to have the same policy as someone without kids, as you’ll want to ensure your children will be financially covered in the event of unplanned death.
Reviewing your insurance cover
Life Insurance isn’t a set and forget exercise. Life changes regularly and so should your insurance cover. Maybe you’ve got a bigger savings fund, and therefore need less cover. Or perhaps you’ve had another little addition to the whanau and would like to increase your insured sum. Health also changes as we age, so it’s important you keep your insurer informed. Periodically review your life insurance coverage with your provider to determine whether you still have enough or too much.
Choosing the best option
Our Life Insurance calculator helps you work out the best options for your situation.
After we learn more about you and your circumstances we will present you with an estimate of how much you would pay for Base Cover, Standard Cover and Extended Cover on a fortnightly, monthly, semiannual or annual basis. You can then assess which cover level gives you the amount of Life Insurance you want and make an informed choice.
You can also speak to a Cigna Insurance Adviser who can tailor an insurance policy to your needs and goals, simply email us and one of the team will be in touch.
If you’re still stuck, Cigna is happy to talk to you through it. Simply contact us and we’ll conduct a full needs analysis, to arrive at a cover level that’s just right for you.