Even if you are in a higher income bracket, you might be surprised to learn that studies show you fall into a group that is most likely underestimating your life insurance needs. According to a Financial Services Council and Massey University report, ‘Exploring Underinsurance in New Zealand’, by Michael Naylor, Claire Matthews and Stuart Birks, “the higher income groups generally have less adequate life insurance”. More than 60 per cent of those who earn more than $150,000 a year are severely underinsured for life insurance cover, or have at least 40 per cent less cover than they should.
Perhaps it’s because asking the question “how much life insurance is enough?” is a hard question to confront. It forces us to think about what life would be like for our loved ones without us there – but thinking about answering this question also gives us the power to ensure they do not suffer unduly from financial hardship.
Think of life insurance as a parachute, which is deployed to help ensure that those you care about have a softer landing. A useful exercise in constructing this parachute is to ask yourself: “What challenges are they likely to face?” and: “How much money will be needed to overcome those challenges?”
Let’s just say at the outset, a qualified insurance adviser is best equipped to help you identify the level of cover you need, but if you are somebody who values knowing what’s going on and wants to be prepared, then answering these questions will help get you started analysing your own situation.
Who or what is at most risk in the event of your death or terminal illness? This may include members of your family, individually and collectively, as well as your business, your partners and other people you may have financial arrangements with (such as co-owners of a boat).
While your immediate priority is your family, other contracts and arrangements you have with people may be impacted and need to be specifically considered.
2. Cost of living
How much money will your family need to live on for at least the next year or two while they find their feet in the event of your death or disability? Analyse your current living expenses and lifestyle costs to work out how much your family would need.
How much debt do you have? This may, or may not, include your mortgage, depending on whether or not you have home loan cover, and if so, the amount of that insurance cover. Factor in business debts and other financial obligations and make sure you’ve got strategies in place to take care of them.
What is likely to happen following your death or terminal illness? Take into account immediate living costs, potential loss of income if your partner is off work to care for you, during the grieving process or to look after dependents and the immediate financial obligations that will have to be met in the first few days after your death, including bills and funeral costs.
What assets, for example investments, business interests, property and savings can be utilised to offset or supplement the level of life insurance cover you will need? Is there a plan in place to make sure this happens in accordance with your wishes and efficiently?
6. Future proof
To what extent do you want your family provided for in the future, bearing in mind that your income contribution would no longer be there? There are numerous ways to help provide for your family moving forward – e.g. investments and property – but most will require expert advice and assistance.
These six questions are designed to help you consider your personal situation and the implications of your unexpected death or terminal illness, but there is no substitute for talking to the experts. Insurance Advisers are trained to help you work through the above in more detail and to consider your personal circumstances when exploring insurance cover options with you. They also have the experience taken from real life scenarios, which they can apply to your situation.