Life Insurance

Life Insurance is an easy enough concept to grasp. If you are insured and die, the life insurance office pays out an agreed lump sum.

The difficulty comes with how much cover you should have.

Many people with employer superannuation will have a minimum amount of life insurance as a "default" option. This might be between $60,000 and $100,000 and is designed to cover funeral expenses and relatively small debts, like credit cards and/or the car loan.

But this would really only be sufficient if you are young, single, have no dependents and no mortgage. Enough to ensure your death is not a financial strain on your next of kin.

As people get older, marry, buy a home and/or investment property, have children, the need for insurance protection increases exponentially.

What happens if you died soon after you and your partner had bought a house? Not only are they still grieving, but could lose the family home because they can't keep up mortgage payments.

What if the deceased was the only working spouse, how will your children be educated?

What if the deceased is the primary homemaker, who will look after the children, run the home and manage the household?

Many financial planners recommend taking out enough insurance to cover your immediate debts.  This can include the mortgage, credit cards, personal loans and funeral expenses.

But that does not leave anything for your loved ones to replace your income or pay for nannies and housekeepers or plan for the future.

Many people want to leave a real legacy - a sum that both clears the debts and can be invested to provide a significant passive income for their family.

This could be any figure. For example, a sum of $1m was invested and earned 6%, it would provide gross income of approximately $60,000 a year - about the average weekly full time salary. This calculation does not take into account inflation or taxation issues. Some Financial Planners recommend 20x your yearly income as a reasonable level of cover.

For super fund members, life insurance can usually be taken out inside the fund. With premiums paid from contributions and no direct cost to the member. However, as it is being paid from contributions within your fund, it will reduce your eventual super payout. There are tax implications for holding cover under super. And you need to seek advice before implementing.

All forms of insurance including Life Insurance become more expensive the older someone is because the older the person is the more likely they are to die.

The benefits of insurance for the non-working parent can also have an impact on the main income earner's future. If a stay-at-home mum or dad did die when the children were still very young, a life insurance payment could mean the working parent does not have to quit their job.

Guide to using Insurance to transfer risks