How much cover is enough? Insurance demystified

A recent industry study1 confirmed what many Australians already know: life cover can be bewildering, and the question of how much insurance we should have is something few people can answer with confidence – and that’s leaving plenty of households vulnerable.


Here’s what you need to know.

A 2019 report2 found one in three Australians simply don’t know if they have life insurance through their super. Of the remaining 70%, only one in two can pinpoint how much cover they have.

This confusion is adding to the problem of underinsurance that has dogged the Australian financial landscape for many years. Sadly, many families only discover they are underinsured when a crisis arises. 

How much is enough?

The level of life cover that’s right for your needs will depend on a variety of factors including your age, family situation, how much debt you have and the financial resources your family could tap into if you were to pass away unexpectedly.

As a guide, actuaries Rice Warner have produced the table below. It shows the basic level of cover needed (relative to annual income) for your age and family size. For instance, if you’re aged in your 30s, and your annual household income is $100,000, you need 6.6 times this amount ($660,000) in life insurance.

Table 1 Average life cover needs for families and children expressed as multiple of years of family income

Age of parents

Basic life cover

20

9.3

30

6.6

40

5.4

50

3.2

Source: https://www.ricewarner.com/life-insurance-adequacy/

Underinsurance – it’s not worth the risk

Illustrating how widespread the problem of underinsurance is, Rice Warner estimates that among Australians who do have life cover, the median level of insurance is around $143,500. Clearly, that’s well below the ideal level across almost every age group shown in Table 1. And if you think about it, a payout of $143,500 wouldn’t go far, especially for a family managing a home loan and education expenses.

Cutting through the confusion

One of the biggest barriers to buying life insurance is the perceived cost.3 However, it can be a lot more affordable than you think. 

Chances are you have some cover in place through your super. So you may only need to top up your insurance.

This can be done through your super fund, though the downside is that the extra premiums will come out of your super savings. You would need to carefully consider how this can impact the final value of your super balance and if you need to make adjustments like changing investments or additional contributions - this is where expert advice comes in and can make all the difference. 

It’s also why plenty of people arrange additional life insurance outside of super. How much you can expect to pay depends on your choice of insurer, as well as personal factors including your age, occupation, and the sum insured.

Expert advice matters

The key issue is that you have sufficient life cover in place to enable your family to live comfortably if the unthinkable happened - with a sustainable solution in place that allows you to satisfy all the other priorities you have in life. These priorities could include your retirement nest egg and all other things that your cash flow has to be spent on such as your children's education, renovations, new car, a growing family, starting a business and the list goes on.

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Posted in: Insurance