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how much insurance is enough?

Where to start with personal insurance?

Marcus English
Private Client Adviser - Risk & Insurance
17 Apr 2018

At Hewisons we’ve been talking a lot lately about the importance of personal insurance. How having the correct level – and type – of personal insurance is an essential part of your financial plan in terms of protecting your wealth and long term financial goals. But if you haven’t gone through the process before, where do you start? How much insurance do you need? What type of insurance?

Insurance is a component of financial planning that is too often an afterthought – or not thought of at all!  We tend to avoid thinking about our own mortality or anything tragic happening to us. Nobody really likes paying for insurance either, especially seeing as you’re not typically getting anything in return for your money (if you’re lucky)! But I guarantee in some cases it can end up a whole lot more expensive, and a lot more stressful, if you don’t have personal insurance.

There are four common types of personal risk insurance:

  1. Death
  2. Permanent disablement
  3. Critical illnesses
  4. And often most importantly, Income Protection (if you lose the capacity to work due to illness or injury)

How much of each insurance type do you need? There are various ways of calculating your insurance needs and there’s not necessarily a right or wrong method. What IS necessary is to tailor the insurance around your personal circumstances – everyone’s situation is different.

A useful strategy is to “spend” the money on paper. That is, think carefully around each of the situations above and consider what financial provisions would be required in each. What are your financial exposures? While doing this, keep in mind that these insurances are not intended to get ahead or rich in the event of tragedy. The purpose of personal insurance is to avoid financial burden and ensure that you and/or your family have the capacity to live comfortably and reach your financial goals.

I’ll focus on each insurance type in upcoming blogs but today let’s start with life insurance, which pays your beneficiaries in the event of death (or terminal illness).

What to consider with life insurance

If you are single, and without dependents, you might argue that your need for life insurance is minimal.  Fast forward a few years, you now have a mortgage and maybe married with young children. All of a sudden your life insurance needs have increased substantially; consider both lump sum requirements and future income requirements.

  • Examples of lump sums required are debt and funeral expenses. Leaving your partner or family debt free takes the pressure off the surviving spouse to keep meeting mortgage or loan obligations. This is especially relevant where the surviving partner is a stay at home parent and not earning an income.
  • Future income requirements consider ongoing income support for your family. This figure is likely to vary depending on circumstances such as whether your surviving spouse works or not, whether they’d take time away from work (and for how long) if you were to pass away, your ongoing living expenses and the plans you had for your children’s education. You end up effectively estimating certain levels of money required for specified periods of time.

People are often surprised when they go through this exercise to see just how much an appropriate level of life insurance is. In many cases, the number is in the millions – especially when you’re younger with large obligations. It’s also relative to levels of income and lifestyle. Having said this, you would also expect that the further you get into your working life, the more your obligatory spend levels reduce – you are paying down debt, children are moving out of home, etc.

Not everyone chooses to maximise their coverage and cost is always going to play a part in your decision. If you decide to compromise and take on a lower level of cover, at least do so consciously and understand the risk.

Losing a loved one or being involved in a serious accident is a tragic time for all involved. By making sure those around you are looked after, you at least remove risk of financial burden. We all work hard to provide and contribute to our families – just make sure you prioritise protecting them in case you’re not there to.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.