What Level Of Life Insurance Cover Should I Have?

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.

Immediate Needs

• 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)

Ongoing Needs

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)

Current Assets

• 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.

About the Author: Mary Kendall writes for MultiCover, specialising in personal risk insurance. Her goal is to provide consumers with a better understanding of life insurance, disability insurance, income protection, trauma insurance and other personal risk insurance. MultiCover Life Insurance Australia - Insure Your Peace of Mind. For a customised personalised risk management strategy that matches your needs. Minimize the financial risk associated with a life hazard event (injury, illness, permanent disability, medical traumas and death) and provide peace of mind.

When to Take Out Income Protection, TPD and Trauma Insurance

Other than death cover there are three major types of personal insurance cover that you can purchase to manage the risks associated with injury, illness, permanent disability and medical emergencies. Each has an important part to play in a personalised risk management strategy.

• Income Protection insurance provides you with a regular income for the period you are unable to work due to serious illness or injury.
  
• Total and Permanent Disability (TPD) insurance which provides you with a lump sum payment aimed at providing you with ongoing financial support as a result of a total or permanent disablement.
  
• Trauma insurance which provides you with a lump sum payment aimed at supporting you financially as a result of being diagnosed with a qualifying illness.

Income Protection Insurance provides you with a regular income stream should you suffer an illness or injury and be unable to work. Your insurance policy will likely pay a monthly amount of up to 75% of your gross salary for an agreed period or until you are well and able to return to work. It is offered with both a benefit period (the maximum period of payment) and a qualifying period (how long you wait for the first payment).

It is important to note that Income Protection and Workers Compensation are quite different. Workers Compensation covers the costs where the injury was suffered at work. Income Protection provides you with a regular income stream for an injury or illnesses that are unrelated to your work.

Keep in mind that not all income protection policies are the same. The varying benefits, features, options and even definitions affect the costs dramatically. The combination of personal information, your agreed benefit period and agreed qualifying period will also affect the cost of income protection cover. As a guide, income protection can cost around one week's salary per year (and can be tax deductable in qualifying countries).

Total and Permanent Disability (TPD) Insurance provides you with an agreed lump sum in the event that you become totally or permanently disabled during the term of the TPD insurance policy.

A disablement that prevents you from earning a regular or replacement income can place a huge financial burden on your family and lifestyle. The additional costs associated with adjusting and managing the disablement adds to this financial stress.

Remember that your TPD insurance needs will vary over time and should be reviewed at least annually.

Trauma Insurance or Crisis Recovery Insurance pays you an agreed lump sum if you are diagnosed with one or more serious medical illnesses. The policy will specify the illnesses that are covered and may differ from one policy to the next. Although most Trauma insurance policies pay immediately on an accidental trauma, it is important to note that generally a Trauma insurance policy has a qualifying period, normally 90 days.

Unlike Income insurance, Trauma insurance will only be paid on the diagnosis of a qualifying illness. Consider a specified illness (e.g. cancer) where you are diagnosed but are able to work. In this case you may not be eligible for Income insurance but you would receive a lump sum through Trauma insurance. However, if you are not working then Trauma insurance would be the only option available.

There are a number of qualifying requirements and options available when it comes to Trauma insurance. Generally pre-existing conditions are excluded from the specified illnesses. Options can include the possibility of structuring a policy such that it minimises the risk for multiple lifetime medical illnesses or alternatively the policy can be in place as a once off event.

Remember that term life insurance only addresses terminal illness and death. Thankfully many of life's hazards do not result in such dire outcomes. Injury, illness, permanent disability and medical emergencies are other potential outcomes that need to be considered carefully.

Recent research showed that 70% of a workforce is likely to suffer from a long-term medical condition as a result of sickness and accident, which lasts six months of more. How would you cope financially if this happened to you? Make a short list of the financial impacts and then complete a financial Risk Assessment for you and your family. This may highlight some concerns and reasons for having the right cover in place.

The field of personal risk insurance can be confusing and therefore worth speaking with a qualified personal risk adviser before making a decision.

About the Author: Mary Kendall writes for MultiCover, specialising in personal risk insurance. Her goal is to provide consumers with a better understanding of life insurance, disability insurance, income protection, trauma insurance and other personal risk insurance. MultiCover Life Insurance Australia - Insure Your Peace of Mind. For a customised personalised risk management strategy that matches your needs. Minimize the financial risk associated with a life hazard event (injury, illness, permanent disability, medical traumas and death) and provide peace of mind.

How Much Life Insurance Do I Need?

Everyone is different and therefore no 'one answer fits all' response can be provided. Consideration needs be given to your family's financial position which takes into account personal assets, income, debt, expenses and life goals. However as a generalisation most personal risk advisers will recommend that you have life cover equivalent to a minimum of 10 times your average annual income. Life insurance must be tailored to your need and the level you require may be higher.

There are a number of free online tools that can help you work through this question based on your family's financial position. For the purpose of illustrating how individualised the needs are I will refer you to free no obligation Insurance Risk Calculator (see the bottom of this article) that I am familiar with or you can Google 'Insurance Risk Calculator' to find one you prefer. The output from the calculator will form part of a personal needs analysis and guide us through a process of considering how much life insurance you need.

An important thing to remember when addressing the 'how much' question is that there are different types of life insurance. There is cover for death, disability, loss of income and a medical trauma. So the amount of cover you need is dependent upon not only your financial situation but under what circumstances you require cover and how important that is to you. This should be quite evident from the personalised results you obtained from the calculator. Some situations will require your focus more so than others.

If you or your partner were permanently disabled or died prematurely you need to consider the costs associated with:

• Paying out the mortgage or remaining debts
• Continuing the children's education
• Ensuring funds are available to replace any loss of family income
• Keeping the family business running
• Covering any medical of funeral costs
• Meeting ongoing medical needs
• Modifying your home
• Supporting the ongoing household expenses
• Maintaining your assets & investments
• Continuing to save for the future and still achieve your life goals.

This is where a lump sum payment through a Term Life Insurance policy and/or a Total and Permanent Disability (TPD) Insurance policy would assist.

If you or your partner became sick or were injured and couldn't work you need to consider the costs associated with:

• Paying your mortgage or weekly rent
• Supporting the ongoing household expenses
• Providing for ongoing children's education and costs
• Maintaining your assets & investments
• Covering additional medical costs as a result of the injury or illness
• Continuing to save for the future and still achieve your life goals

This is where a regular income stream through an Income Protection policy would assist.

If you or your partner suffers a major medical illness (heart attack, cancer, etc) you need to consider the costs associated with:

• Covering any medical associated with crisis recover
• Funding a change of lifestyle
• Paying out the mortgage or remaining debts
• Continuing the children's education
• Ensuring funds are available to replace any loss of family income
• Helping the family members achieve their life goals

This is where a lump sum payment through a Trauma Insurance policy or Crisis Recovery policy would assist.

It is important to note from the examples above that it is a combination of the various types of personal risk insurance that provide the best protection.

Based on your situation, either as a result of the calculator or through having a broader understanding of the impacts, you now know that the cover you require must be tailored to your situation. Many people fall into the trap of purchasing term life insurance without considering their needs and the impact of life's hazards (injury, illness, permanent disability, medical traumas and death). The solution should be customised to provide a personalised risk management strategy that matches your needs. A good personal risk adviser can do this for you and usually within your budget.

Therefore the amount of life insurance cover you need really is a very personal question.

Reference Calculator: Insurance Risk Calculator  (this is a free online tool that maintains your anonymity but provides a thought provoking analysis).

About the Author: Mary Kendall writes for MultiCover, specialising in personal risk insurance. Her goal is to provide consumers with a better understanding of life insurance, disability insurance, income insurance, trauma insurance and other personal risk insurance. MultiCover Life Insurance Australia - Insure Your Peace of Mind. For a customised personalised risk management strategy that matches your needs. Minimize the financial risk associated with a life hazard event (injury, illness, permanent disability, medical traumas and death) and provide peace of mind. Mary Kendall