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Making sure you’re covered for life – insurance made simple

Wilson Luna

Of all the personal insurance covers, life insurance is probably the one that most people don't like to talk about, but the truth is that taking out a policy really isn’t ‘tempting fate’ as some people believe, and it’s an excellent way to ensure that your family will be provided for if something bad should happen. The scariest part of life insurance isn’t actually getting it – it’s your family finding out that they’re not covered, or are underinsured, if the worst does happen. A 2005 study commissioned by the Financial Services Association showed that up to 60 per cent of Australians were underinsured and that many families would not receive enough money from the benefit to cover a year’s income. Working out exactly how much insurance you need so that your family has the time and resources to put their lives back together again is vital – our DIE formula (there’s a name you won’t forget) will help you calculate the amount of insurance you’ll need, so let’s take a look at how to put it into practice:

‘D’ is for debt repayments. When taking out life insurance many people opt for a policy that will cover the mortgage on the family home. While that’s a good start, it doesn’t take into consideration any other debts you may be responsible for. Make sure you add in enough to pay off any credit card balances, personal loans or other debts the family has so you can be sure you’re leaving your loved ones with a clean slate.

‘I’ is for income requirements. Regardless of whether your role is bringing in an income or working as a homemaker your contribution to your family will need to be replaced. The best option for achieving this is to ensure that the money from your insurance will produce enough interest to cover your family’s current standard of living without touching the capital. For example, $500 000 invested at six per cent per annum would return $30 000 a year in interest (before tax).

‘E’ stands for expense management. Funerals are more expensive than many people realise, and they need to be paid for at a time when most families are least prepared to deal with financial issues. Look into pre-paying your funeral or research how much a funeral could cost and add this amount to your estate administrator’s fee.

Not part of the acronym, but still important, is to consider purchasing your life insurance through your superannuation fund. While not all funds offer this option, it can be a good alternative because the premiums are usually lower and as a general rule you’ll be automatically entitled to a minimum level of cover. Just remember that the premium is taken out of your super contributions, so you’ll need to increase your contributions accordingly.

It’s also worth remembering that life insurance is not something you can ‘set and forget’. You need to recalculate your level of cover as your circumstances change, because the amount you need will alter throughout your life. It's worth making a point of reassessing all of your insurance covers regularly to ensure that they continue to meet your needs.

Finally – and most importantly – remember that life insurance is really complicated. Dealing only with a reputable insurance adviser will help to ensure that all of the fine print is taken into consideration and that you’re covered for everything you need and nothing you’re not, which will give you greater peace of mind when it comes to knowing that your family will be taken care of.

If you liked this article you might also be interested in these other articles about personal insurance:

Expect the unexpected - understanding the essentials of personal insurance

The two-minute guide to disability insurance

Want more? Take a look at the rest of our articles on personal insurance covers.

Tags: personal insurance covers, life insurance, insurance covers

Author's Biography

Wilson Luna is an author, wealth adviser and founder of Your Family Your Money. Your Family Your Money’s goal is to simplify traditionally complex financial strategies, demystify financial jargon and debunk common financial myths, becoming every family’s first stop for financial advice, information and inspiration.