Insurance- How much cover is enough?

Insurance Planning

Under insurance is a huge problem in Australia, there are 2 main reasons for this, alot of us are blasé in relation to the fact that a member of their family could become critically ill, injured or worse still pass away and essentially ignore the risk and figure that it won’t happen to us, therefore do not prepare for the financial risk associated. I don’t need to tell everyone that this is a naive view, serious illness and accidents happen to people everyday and although we all hope it doesn’t happen to us or our love ones, but none of us are immune.

The second reason we are under insured is that many of us are not accurately aware of the financial risk we are exposed to if we are ill, injured or worse still a member of the family passes away, and are also unaware of the insurances available. In todays article I’ll focus on calculating life insurance needs.

As a family we make financial commitments that make us dependant on not only our income but in many cases also our partner’s income, the extent of our financial reliance on each other is often undervalued.  

Most people are aware of and understand  life insurance and many have cover, either held in super or directly, but more than half have insufficient cover to maintain the family lifestyle in the event of the insured’s death.

To Calculate life insurance we normally look at the clients expenses, debts, income requirements to determine how much is needed for the family, than take into consideration the assets available and use insurance to cover the gap.

The expense component, often referred to as clean-up, normally include funeral costs, legal costs and other expenses that surround the death of an individual, some also like to include some additional funds to cover some time off work and alike. This amount is usually relatively small and fairly consistent client to client, ranging somewhere from $5,000-$25,000

Most clients require both partners’ incomes to service debts; therefore in general clients will need to have sufficient cover to pay down most or all of their debts. If all debts are paid down the family will be able to keep all assets, most notably the family home, with no debts against them. This is important even in the event of a non working spouse, the working spouses capacity to earn may be significantly reduced, therefore it is prudent to secure the families assets by paying down all debts.

Income requirements are an often forgotten part of the insurance calculations. In many cases, even without debts, the surviving family will have insufficient income to meet expenses. When calculating income requirements it is normal to separate into income required for children and income for the surviving spouse, we then calculate a per annum figure for each, and determine the length of time the income is required. The reason we separate the 2 is that income for the children is usually a different period of time to that of the spouse. The income shortfall can be hard to determine, but a good financial planner will be able to guide you through this process.  Often income requirements may change, a spouse may require more income initially why they are “getting back on their feet” or are taking care of the children and unable to work. As an example they may need $20,000 pa for the first 5 years and $10,000 pa for the following 10 years. Once we have determined the income needs and time periods for Children and spouse, we calculate the lump sum required to provide that income.

Once the 3 amounts are combined and we have identified the needs, we than subtract assets that the family is able to use to provide for the above expenses, these include Superannuation, investments and cash, to identify the cover required.

A working example to demonstrate the process.

John & Mary are 35, they have 2 kids, one 7 year old and a 5 year old. John is employed full time, Mary no longer works. John has $100,000 in super and $20,000 in savings.

They have $415,000 in debts, it is estimated that that the income required for their children is $10,000 per annum, and Mary will require $20,000 pa for the first 10 years and than $10,000 pa until she reaches age 65.

John’s life insurance:

Debts                         $415,000

Expenses                  $10,000

Income Spouse        $277,978

          Chiildren         $230,976

Coverage needs       $933,733

Less Assets               $120,000


Insurance Needs     $813,733


Calculating the level of insurance is the first step in the insurance planning process.


Please contact Future Financial services for more information Phone: 02 47276588 or via our Contact Page

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services


  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State


  • University of Western Sydney
  • Penrith High


As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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