Worked Examples and Checklists
How much life insurance do I need? A worked Australian example
Calculate how much life cover you need using debts, final costs, income replacement, children's costs, super and existing cover, with a full worked example.
A practical way to estimate life cover is: debts to repay + final and immediate costs + future income your household would need + children's future costs − assets that would be available − life cover you already hold. For a family with a mortgage and young children this often comes to several times the main earner's annual income, and well above the default death cover in super. For a single person with no dependants it may be little more than debts and funeral costs. Work it through with your own figures; the structure matters more than any rule of thumb.
This guide is part of the worked examples section. All figures are illustrative.
The needs calculation
| Item | What to include | Notes |
|---|---|---|
| Debts | Mortgage, car loan, personal loans, credit cards | Clearing the mortgage is often the biggest single item |
| Final and immediate costs | Funeral, estate administration, a buffer for the first months | Funerals commonly cost several thousand dollars or more |
| Income replacement | Annual amount the family needs × years needed | Adjust for the surviving partner's income |
| Children's costs | Education, childcare, extra costs until independence | Private school fees can be large |
| Less: assets available | Savings, investments you would sell, super balance paid as a death benefit | Do not count the family home |
| Less: existing cover | Death cover in super and retail | Check it is active |
Income replacement in more detail
You can estimate the amount needed to replace income in two ways:
- Simple multiple: annual amount needed × years. Easy, but ignores investment returns and inflation.
- Capital needed to produce an income: annual amount ÷ an assumed sustainable withdrawal rate. For example $40,000 a year at an assumed 5% withdrawal rate needs $800,000. This assumes the capital lasts indefinitely, so it overstates the need for a fixed period.
A middle path is to choose a number of years, such as until the youngest child turns 18 or 22, and multiply.
Worked example: a couple with two young children
Illustrative household:
- Chris, 37, earns $120,000. Partner Jess, 35, earns $50,000 working part-time.
- Children aged 2 and 5.
- Mortgage $580,000. Car loan $18,000. Credit card $3,000.
- Savings $25,000. Chris's super $95,000. Jess's super $60,000.
- Chris holds $350,000 of death cover in super. Jess holds $150,000.
Life cover needed on Chris:
| Step | Calculation | Amount |
|---|---|---|
| Debts | $580,000 + $18,000 + $3,000 | $601,000 |
| Final and immediate costs | Funeral, legal and a 6-month buffer, illustrative | $40,000 |
| Income replacement | Household needs $75,000 a year after the mortgage is gone. Jess's take-home pay covers about $42,000. Gap $33,000 × 16 years until the youngest is 18 | $528,000 |
| Children's extra costs | $10,000 a year for childcare and schooling, illustrative, for about 10 years | $100,000 |
| Total need | $1,269,000 | |
| Less savings | −$25,000 | |
| Less Chris's super balance paid as a death benefit | −$95,000 | |
| Less existing death cover in super | −$350,000 | |
| Gap | $1,269,000 − $470,000 | $799,000 |
Chris might round to $800,000 of extra cover, through his fund (with health questions) or a retail policy.
Life cover needed on Jess: If Jess died, Chris would lose her income and face extra childcare costs. Debts $601,000, final costs $40,000, replacement of her contribution and extra childcare, say $30,000 × 16 = $480,000, children's extras $100,000. Total $1,221,000 less savings $25,000, her super $60,000 and existing cover $150,000 = $986,000. Many households undervalue the cover needed on the lower-earning or non-working partner.
Adjustments to consider
- Inflation. Most policies index the sum insured to CPI each year. That keeps the cover's value, but premiums rise.
- Tax. Death benefits paid from super to a spouse or a child under 18 are generally tax-free. Paid to adult children who are not financially dependent, the taxable component is taxed. See tax on life and TPD payouts.
- Centrelink. A large payout may affect a surviving partner's eligibility for income-tested payments.
- Reducing need over time. As the mortgage falls and children grow, the need falls. Review every few years, and consider stepped premiums if the need is temporary.
- TPD is different. If you become disabled, you are still alive and have care costs. See how much TPD cover do I need.
Mistakes in the calculation
- Counting cover that has lapsed. Check old super accounts against the opt-in rules.
- Counting the home. The family will usually want to keep living there.
- Using gross rather than take-home income. Replace what the family actually spends.
- Ignoring the non-earning partner. Childcare and household costs are real.
- Forgetting the nomination. Super death benefits follow the fund's rules and your nomination, not your will automatically. Make a valid binding nomination if your fund allows it.
Frequently asked questions
Is ten times income a good rule of thumb?
It is a rough starting point. For Chris it would be $1.2 million, close to his total need, but rules of thumb ignore debts, existing cover and the partner's income. Do the calculation.
Should I insure enough to pay off the mortgage only?
That is a minimum for many families. It removes the biggest cost, but the surviving partner may still need income support for childcare and living costs.
Do single people need life cover?
Often only enough for debts and final costs, unless they support parents or others. TPD and income protection may matter more.
Is the payout taxed?
A retail life policy paid to a beneficiary is generally not taxed. Super death benefits can be taxed if paid to non-dependants.
Sources
- Moneysmart — life insurance calculator and guides
- ATO — super death benefits and dependants
- Services Australia — payments after a partner's death
