How much life Insurance do I need?

When considering Life Insurance, it’s common to ask: ‘How much Life Insurance do I need?’ Even if you have an existing policy, it might not be up to date – which means your family might not receive adequate financial coverage in the event of your passing.

Ideally, your Life Insurance policy should take your debts and any ongoing expenses (such as mortgage repayments) into consideration. It’s additionally beneficial if your policy covers additional costs such as legal fees and funeral expenses.

In this guide, we’ll provide information to help you get coverage that’s tailored to your situation. Keep reading to find out how to calculate your insurance requirements using the following methods:

• Rule-of-thumb (i.e. multiplying your annual income by 10)
• DIME (i.e. calculating based on Debt, Income, Mortgage, Education)
• NobleOak’s Life Insurance Calculator

Why is Life Insurance coverage important?

Life Insurance can provide essential financial protection for your dependants in the event of your passing. The right amount of coverage can help:

• Replace your income to maintain your family’s standard of living
• Pay off outstanding debts and mortgages
• Fund children’s education and care needs
• Cover final expenses and medical bills

By having adequate Life Insurance coverage, you’re investing in your family’s future security and wellbeing. Adequate Life Insurance can safeguard your family’s future by protecting them from the long-term financial impact of losing a loved one.

You can find out more here: Why You Might Need Life Insurance.

Key factors to consider when calculating Life Insurance needs

The first step in deciding how much Life Insurance you ay need is to take a good look at your finances. While it’s impossible to know exactly how much your loved ones will need, you can arrive at a reasonable estimate by looking at your current financial situation, what you’re responsible for, and what you want to achieve.

Here, we’ll discuss five factors to consider when you’re deciding on a level of Life Insurance cover. Remember that your insurance needs may change over time, so it’s important to review and adjust your coverage as your circumstances evolve.

Current income and future earnings

When calculating how much Life Insurance you need, start by considering your annual income and potential future earnings. For example, if you earn $100,000 annually and want to provide 10 years of income replacement, you might need $1,000,000 in coverage for this aspect alone. Remember to account for inflation and potential career growth.

When you apply for Life Insurance with NobleOak, consider your current income against your living expenses, including your average monthly spend on:

• Groceries
• Banking and insurance
• Medical
• Holidays, transport and commuting
• Entertainment and eating out

Together with your income, these factors will form the baseline of your financial profile – making it easier to estimate your Life Insurance requirements.

Debt obligations

To provide financial security for your loved ones, your Life Insurance coverage should account for any existing debt. For example, if you have a $500,000 mortgage, $20,000 in car loans and $5,000 in credit card debt, you should choose a policy that covers at least $525,000 – to prevent your family from inheriting financial .

Dependants’ needs

If you have children, it’s a good idea to factor in ongoing expenses such as:

• School fees
• Future university costs
• Childcare
• Daily living expenses

And if you have a partner, you may want to consider taking out enough cover to provide them with:

• Living expenses
• Home ownership
• Further education
• A retirement fund

This has become more complex as more and more people live in “blended” families.

Final expenses

When deciding on how much Life Insurance you need, include provisions for final expenses.  Funeral costs typically range from $8,000 to $15,000 dollars, and end-of-life medical bills can amount to several thousand dollars.

Existing assets and policies

Your current assets can offset how much Life Insurance you need. For example, you might have:

• $200,000 in superannuation
• $50,000 in savings
• $100,000 in investments

These assets might reduce your additional insurance needs by $350,000. However, consider whether you want these assets available to your family for other purposes rather than using them to replace Life Insurance coverage.

You should also remember that superannuation (including life insurance within superannuation) is not “inherited” in the usual way, and you should consider a binding death benefit nomination or speak with your superannuation trustee about this.

In addition to this, you should take into consideration any insurance policies you already have – either through an independent insurance provider or your superannuation fund.

Tools and methods to calculate Life Insurance needs

Here, we’ll provide some common methods of calculation to understand how much life insurance you should have, including the free Life Insurance Calculator from NobleOak.

Rule-of-thumb

The rule-of-thumb method provides a quick way to estimate your Life Insurance needs. It typically involves multiplying your annual income by a specific factor – such as 10 – depending on your personal circumstances. This factor accounts for the number of years your family would need financial support in the event of your passing.

This approach assumes that your beneficiaries would need funds to replace your income, cover living expenses, and manage significant debts like a mortgage. However, it may not adequately address other financial goals, such as paying for your children’s education, covering funeral costs, or planning for inflation.

Example Calculation

Let’s say you earn $80,000 per year. Using the rule-of-thumb method, you multiply your income by 10:

$80,000 × 10 = $800,000

In this case, you may need $800,000 in Life Insurance coverage to provide financial security for your family over the next decade.  Remember to always allow for inflation and career growth.

DIME method

The DIME method is a structured approach to calculating Life Insurance needs by considering four key financial areas:

• Debt
• Income
• Mortgage
• Education

First, calculate your outstanding debts, such as personal loans and credit card balances, excluding your mortgage. Next, estimate the income your family would need to replace for a specific number of years. Then, account for the remaining balance of your mortgage. Finally, consider the future costs of education for your children, such as tuition and school fees.

Example Calculation

Let’s assume the following financial situation:

• Debt: $20,000 in personal loans and credit card balances
• Income: Your annual income is $80,000, and your family would need it replaced for 5 years
• Mortgage: $300,000 remaining on your home loan
• Education: $50,000 estimated for your children’s future education costs

Using the DIME method:

$20,000 (Debt) + $400,000 (Income replacement: $80,000 × 5 years) + $300,000 (Mortgage) + $50,000 (Education) = $770,000

In this example, you would require $770,000 in Life Insurance to cover these essential areas. Remember that debt carries interest so you may need to increase the figure.

Life Insurance calculators 

You can use NobleOak’s Life Insurance Calculator to determine the amount of cover you and your family may need in 5 steps. It only takes 5-10 minutes to use. The assessment includes everything that falls under the Life Insurance umbrella including:

• Life Insurance
• Income Protection Insurance
• Total and Permanent Disability Insurance
• Trauma Insurance

You’ll be provided a free report which will provide you with levels of insurance cover you may wish to consider based on the information entered by you into the tool.

The methodology and assumptions used in the NobleOak Life Insurance Calculator have been reviewed and audited by RiceWarner, a leading independent provider of research and actuarial advice to the Australian Financial Services Industry.

Common mistakes to avoid when choosing coverage

NobleOak’s latest Life Insurance Pulse Report* highlighted that 27% of Australians who had Life Insurance through superannuation felt that they were underinsured. Not having enough insurance coverage to suit your situation is quite common – which is why it’s important to take the time to fully consider the needs of you and your family.

These are the most common mistakes when it comes to choosing Life Insurance:

• Overestimating your needs – which can result in unnecessarily high premiums
• Underestimating your needs – which means your family won’t receive adequate financial coverage in the event of your passing
• Not accounting for inflation
• Ignoring future life changes (e.g., having more children)

To avoid these mistakes, using any of the tools provided in this article can help. Alternatively you could seek advice from a financial adviser.  The other option is to speak to our friendly team at NobleOak by calling 1300 041 494 however please be aware that the team can only provide you with general advice and the final decision around how much cover you need will need to be made by you.

How to review and update your policy over time

It’s important to review your Life Insurance policy over time and make updates if your life situation changes. Here are some of the key milestones that might necessitate an update to your policy:

• Getting married
• Having children
• Purchasing a home
• Starting a new business
• Changing career
• Planning for retirement

Similarly, reducing debts or achieving significant savings could mean you need less coverage, allowing you to adjust your policy accordingly.

Our team can help if you ever find yourself asking ‘How much insurance do I need?’ To update your details, top up your existing cover, seek information, or make a claim, visit our existing customers page.

Award-winning Life Insurance

NobleOak provides quality Life Insurance with competitive premiums and exceptional service. We’re Australia’s most awarded direct life insurer and the only life insurer to win the Canstar Outstanding Value Award for Direct Life Insurance for eight consecutive years from 2016 to 2023.

Ready to get started? Use our online quote tool, or call our team on 1300 041 494.

*Research conducted on behalf of NobleOak by The Market Intelligence Co, December 2023 with over 1,000 Australian citizens or residents.

Any financial product advice is general in nature only and does not take into account your individual circumstances, objectives, financial situation, or needs. Before acting on it, please consider the appropriateness of the information, having regard to those factors. Any third party websites or tools referred to are subject to their own terms and conditions and NobleOak Life Limited makes no representation or warranty as to any information on those websites. Persons deciding whether to acquire or continue to hold life insurance issued by NobleOak Life Limited should consider the relevant Product Disclosure Statement and Target Market Determination for the product. NobleOak Life Limited ABN 85 087 648 708 AFSL 247302.