All good personal risk advisers will have a rigorous process they follow to ensure that any recommendation made takes into account what you would want or need for yourself or your dependents in the case of your death. Their aim is to provide a personal risk management strategy that supports your family’s lifestyle and financial plan on an ongoing basis. As such there is no set formula that quantifies the sum of insurance you require.
As part of the fact-finding process used by an adviser when interviewing you there are a number of financial questions that are asked. The response to these questions combined with a personal needs analysis will enable the adviser to formulate their recommendation.
When considering term life insurance there are a number of simple questions that you can ask yourself which will help to provide an indication of the likely amount of cover required. This should not be used other than as a guide and to help prepare for a discussion with an adviser. Simply place an estimated after tax value against each entry in the list below.
- What is the value of your personal and business debt (including mortgage)?
- What is the value of replacing ageing assets such as your car?
- What is the value of your children’s future education?
- What is the value of one month’s salary (emergency fund)?
- What would you like to provide for funeral costs?
- What is the value of paying out any other items or assets not already covered?
- What is the value associated with future life goals (overseas trips, holiday house, etc.)
- TOTAL this section (A)
This section is calculated by converting annual income to a capital sum by dividing it by an assumed earning rate of 5%. This lump sum then funds the income requirements through earnings.
- What is the value of your annualised after tax income divided by 5%?
- TOTAL this section (B)
- What is the value of your investments (excluding mortgage)?
- What is the value of your current term life insurance cover?
- What is the value of your other assets not covered in earlier sections?
- TOTAL this section (C)
Your likely cover requirements are then (A) + (B) – (C).
As a check this value should be at least 10 times your average annual salary, perhaps a lot higher. This is very much a ‘status quo’ situation and indicative of what you may provide for your beneficiaries to maintain their lifestyle. You should also consider the same process for your spouse or partner so that they provide for your future should they pass away unexpectedly.
This is a very generalised approach and does not take into account your particular insurance objectives, broader financial situation and needs. Your next step should be to speak with a qualified insurance adviser who will help you determine what insurance cover is right for you and your family.