How Does A Life Insurance Calculator Determine How Much Cover I Need?

Most probably, you've come across a life insurance calculator that seems to "magically" estimate how much cover you need. Well, the life cover estimate is based on your current financial status, as well as, inflation and future earnings. This will give an estimate of adequate cover to sustain the needs of your dependents, in case you die. Key Aspects That Help Determine Your Level Of Cover In order to get an estimate of the level of cover that you need, you must input certain details into the life insurance calculator. These include: I Assets Your income is your biggest asset. This is evident from a 2012 report, by National Centre for Social and Economic Modelling (NATSEM), which reveals that Australians with postgraduate degrees have a lifetime earning potential worth $3.2 million. When you have a higher income, you're better able to pay higher premiums. On the other hand, having less income means that, regardless of your financial needs, you'll not be able to consistently pay high monthly or annual premiums. Therefore, higher earners would have the advantage of obtaining greater levels of cover. II Debts The higher your level of debt the more cover you need, in order to insulate your dependents financially, in case you die. This is especially critical, since the (RBA) indicates that the ratio of average Australian household debt compared to disposable income increased by 28% since ten years ago, to reach 147% in 2012. Moreover, the ratio of total Australian household debt in relation to assets rose from 9% to 17.6%, between 1990 and 2012. This means that families would have much less capacity to pay off debts - even if they had to sell off their property. Therefore, anyone with greater debt compared to assets and/ or income would require higher levels of life cover to help his/ her family pay off the debts when he/ she dies. Various forms of debts include: (i) Current Mortgage Balance: Australian Mortgages account for the largest portion of household debt: 133% of annual income after tax (based on statistics by the RBA). In case you are close to completing payment on your mortgage, your level of cover would be much less than someone who has just taken a mortgage. (ii) Current Loans: Many households have different types of loans, including: car and personal loans. Because such loans must be paid, you must have sufficient life cover to shield your dependents from financial burden, in case you die. (iii) One-off Costs: Such costs include your children's education, holidays, weddings and home renovations. Your children's education is particularly important, sine this will improve their prospects in life. You need to factor in the cost of educating your children from birth until they finish school, which could range between $22,076 to $191,608 (based on estimates for families with two children in a 2012 survey by the National Centre for Social and Economic Modelling (NATSEM)). (iv) Funeral Expense: This is one cost that a life cover simply cannot do without. By taking care of your funeral costs, you spare your family further turmoil, since they would already be in emotional pain at your departure.