I must admit that most people don’t get too excited talking about insurance, and therefore often don’t give it the attention it deserves. The problem is, if the worse happens, very few families would have the means to maintain their lifestyle without proper insurance.

A 2013 survey from insurance provider TAL found that only about one third of Australians of working age had life insurance, and about 1 in 10 had Trauma or income protection insurance. Worse still a Rice Warner survey indicated that even for those with insurance, over half were underinsured.

I’m often asked do we really need life insurance?  In simple terms if someone is financially dependent on you, it is likely that you need insurance.  How much insurance do I need is a more complex question.  At our office we have a very structured method of calculating how much cover will be required.

In broad terms we attempt to calculate how much money the surviving family will require to maintain their lifestyle for the remainder until life expectancy. We also estimate future income likely to be earned by the surviving partner (this may be reduced without the support of their partner) and saleable assets that have already been accumulated.

The gap between the sum required and the future income and current assets is the amount of life insurance we need.

We have a very defined process to calculate the future income needed. We look at debt, living costs and specific costs such as children’s education. We take into consideration inflation, future changes such as children leaving home and other potential changes.  We are able to use this information to calculate a figure that the family requires to maintain their lifestyle.

The saleable assets usually include Super and investments, including investment properties. Although we call them saleable assets, the assets won’t necessarily be sold, but it is envisaged that they will be used one way or another to help provide for the family.

The calculation of future income is based on the surviving spouse’s income keeping pace with the average Australian wage increases. However we will often make adjustments where a change in work situation is likely. The most common being an increase in work hours when the kids reach school age.

Although these calculations require estimates and assumptions, they provide an excellent framework to ensure that your family is taken care of in the event the worse happens.

Although not something we like to think about, it is all too common that a death in the family which is already emotionally shattering can also result in an enormous amount of financial pressure. Life insurance can at least relieve the financial pressure.