How much insurance cover is enough?
This is a question we get asked a lot when talking with our clients around the topic.
Sometimes people pluck figures out of mid-air. Other times it is a little more scientific.
From our perspective here at Rothgard, to say you need enough cover to get the job done is slightly unhelpful. It doesn’t give you any answers, right?
Let’s put it this way.
The whole purpose of insurance is to not make you rich, it is to stop you from going poor.
Think about this in a real life context. In reality, we don’t ever want to be in a situation where we have to claim on insurance. This usually means something bad has happened. We need this cover in a time of distress to ensure we can “keep on keeping on”.
So how much insurance cover might be enough? Here are some questions we typically ask:
1. How much of our debt do we want to clear?
In the event of death or being injured and unable to work, you may want to pay off the following:
- Principal place of residence
- Investment property debt
- Personal debt
- Car debt
For things that you don’t intend on selling post a death or disablement, you should ask yourself the question, “If I am not going to sell these assets, how will the debt be serviced?”
2. How much money do we want to leave our spouse and family in year 1?
In a sudden death, there will invariably be short term expenses to cover. Things to factor in here include:
- Funeral costs
- Compliance costs
- Estate wind up costs
- Any one-off wishes you had for your family e.g. a lump sum payment to a child
3. How much money does your family need per year and for how long?
Assuming you have a young family, significant ongoing costs will exist for many years to come. Things to keep in mind here include:
- What type of schooling do you want for the children?
- Will the surviving spouse continue to work?
- If so, how much will the spouse work (part time or full time)?
- How long will this be required to ensure all family expenses are covered?
Total or Permanent Disablement
Typically a serious disablement (something that could have potentially taken your life but didn’t) means you can’t work or you have a reduced capacity to work. The above thinking isn’t that different. In addition, we need to factor in ongoing medical costs & care.
The real question here is “How much money should I allow myself to get the best health care and quality of life that is required”.
The Cheapest Ain’t Always the Best!
The old adage certainly rings true here – you definitely do get what you pay for when it comes to insurance. Our advice – read the fine print.
Understand what is excluded to ensure there are no nasty surprises when it comes to actually having to claim on your insurance. Some policies won’t cover non-accidental death, certain countries are excluded and death on annual public holidays will not be covered.
When you go looking for a TV or car, you usually have specific features in mind. You will pay extra to get a specific feature. Insurance is no different.
When to Reassess?
We advise an annual review & check up. Alternatively, every time there is a significant life event such as marriage, birth of a child or buying or selling an asset.
The other trigger milestone is any significant changes in income.
The time not to do this is when your health has changed. Any health changes should be pre-empted (easier said than done!).
If you need assistance with your insurance, contact us or pick up the phone and call 1300 720 171 and get busy on your goals.
“This document or website contains general advice only. You need to consider with your financial planner, your investment objectives, financial situation and your particular needs prior to making an investment decision. Charter Financial Planning Limited and its authorised representatives do not accept any liability for any errors or omissions of information supplied in this document except for liability under statute which cannot be excluded.”