How much is enough?

By Nick Bruining

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In days gone by, lesson one in life insurance sales school was to rattle of a harrowing tale about a destitute spouse and her three young children and the misery caused by dad having inadequate life insurance. How well the tale could be retold often determined success or failure but the” pressing underlying question was always: How much is enough? In most cases, households rely on basic life insurance cover usually provided automatically through compulsory superannuation. Default super options include a set dollar amount each week where the amount of insurance cover declines as the member gets older. For example, $1.10 per week might buy you a level of cover which, for a 45 year old is $317,500 of death cover dropping to $190,500 per unit once the member reaches 50 and reducing further as the member ages. In this case, the cover is automatic, requiring minimal health information from the member and is deducted from the total account balance on an ongoing basis. Theoretically, higher life cover levels in the earlier years reflect the fact that the member has minimal assets when starting out. As life moves on, the superannuation fund account balance and other assets increase in value, reducing their dependency on life insurance to provide an “instant estate” for beneficiaries. At any stage, the member can usually elect to cancel the life insurance cover. However, because many younger people don’t know about the opt-out provision, some people have been critical of the fact that low-income earners such as part time or young employees see much of the employer contribution disappear in automatic premium payments. The cover can be switched off, but some people don’t even know they are paying for it until they receive their first member statement, sometimes months later. Methods of calculating the level of life cover required vary and different methods have been suggested over time. In some cases, the methods are built into employer -super schemes. For example, one common formula is 15 per cent times salary times the number of years to age 65, less the existing superannuation account balance. So, a new 25-year-old employee earning $50,000 a year would get life insurance of 15 per cent X 50,000 X 40 years, or $300,000 of cover provided. Critics say that this method does not ensure that insurance will cover the amount of debt the employee may have. In this case, a more accurate approach is to’ cost all debt and potential debt and to ensure that adequate funds are on hand to provide for dependents until they are no longer dependent. For example, a single parent with a two children aged 4 and 2, would provide for a live-in nanny until the youngest child reaches 18. The calculation might look something like the example, above. For a couple, you simply replicate the calculations based on the individual’s level of existing cover and liquid assets. In this example, and based on one industry fund’s premium levels, death-only cover would be a modest $6.68 per week. In almost all cases, the cheapest insurance cover is the cover offered through an employer super fund. Usually minimal medical information is needed. Low-fee industry-based superannuation funds have fairly strict levels of cover but you can buy extra units up to certain limits. As well as death and total and permanent disability cover, many super funds now offer salary continuance or W7 income protection insurance. In many cases, the premiums offered via a super fund will be cheaper than they would be for a stand-alone policy.