How Much Life Insurance Cover Do You Really Need?

Choosing a life insurance amount can feel like picking a number out of thin air.

Should it be enough to clear the mortgage? Replace several years of income? Cover the children until they become independent? And what happens if the amount that looks sensible today is no longer enough in ten years?

There is no single figure that works for everyone. The right level of cover depends on the financial gap your death could leave behind—and how much of that gap you would like insurance to fill.

Start With the Financial Impact on Your Family

A useful starting point is to imagine what would happen financially if you were no longer there.

Which bills would continue? Would your household lose an income? Could your partner continue working the same hours, or might they need more flexibility to care for children?

For example, consider a couple in their mid-30s with two young children. Both parents earn an income, but one earns considerably more. If the higher earner died, the surviving partner might still have their own income, but covering the mortgage, childcare and everyday costs could become difficult.

In that situation, life insurance may help create breathing room rather than simply paying for immediate expenses.

Consider Your Mortgage and Other Debts

Many people begin their calculation with the mortgage. Clearing some or all of the home loan could reduce the pressure on the surviving family and make ongoing costs more manageable.

Other debts may also need to be considered, including personal loans, credit cards or business-related obligations.

Suppose a family has a $600,000 mortgage and $25,000 in other debt. They may decide they want enough cover to clear both amounts. Another family might prefer to repay only part of the mortgage, particularly if the surviving partner has a stable income and could comfortably manage a smaller loan.

Neither approach is automatically right or wrong. It depends on the outcome you want to create.

Allow for Lost Income and Everyday Living Costs

Paying off debt is only one part of the picture. Your family will still need money for groceries, rates, utilities, transport and other regular expenses.

One way to think about this is to estimate how much income your household would lose and how long financial support may be needed.

A parent with children aged four and seven, for example, might consider enough cover to support the household through the children’s school years. Someone whose children are older and whose mortgage is nearly repaid may need less.

Rather than automatically multiplying your salary by a set number of years, look closely at your family’s actual expenses. This may provide a more realistic estimate.

Think About Future Costs

Some costs have not happened yet, but may still matter to you.

These could include education, childcare, funeral expenses, home maintenance or financial support for a dependent family member. You may also want to provide a buffer for unexpected costs.

For instance, a couple might want to allow for future school expenses but decide against fully funding university costs. Another family may place a higher priority on allowing the surviving parent to reduce their working hours for several years.

Life insurance cannot remove the emotional impact of losing someone, but it may give the family more choices during a difficult period.

Subtract the Resources You Already Have

Your required cover does not necessarily need to equal the full value of every future expense.

You may already have savings, investments, KiwiSaver funds, existing insurance or assets that could contribute to your family’s financial position. Your partner’s income may also meet part of the household’s ongoing needs.

A household estimating a potential need of $1 million might already have $150,000 in savings and investments. Depending on their circumstances, they may choose to insure only the remaining gap.

Be cautious about relying too heavily on assets that may fluctuate in value or that your family would prefer not to sell.

Balance the Cover Against the Premium

More cover generally means a higher premium. The aim is not always to buy the largest possible policy, but to find a level that addresses your main risks while remaining affordable.

A carefully structured policy that you can maintain may be more useful than a larger amount that becomes difficult to pay for later.

Your health, age, occupation, smoking status and policy structure may all affect the cost. Because circumstances change, it is also worth reviewing your cover after major life events such as buying a home, having a child, changing jobs or separating from a partner.

Bringing the Numbers Together

A practical estimate might include:

• Mortgage and other debts
• Several years of lost household income
• Childcare and education costs
• Funeral and immediate expenses
• An additional financial buffer

You can then subtract savings, investments and other resources that would be available to your family.

This gives you a starting point rather than a perfect answer. The final amount should reflect your priorities, budget and wider financial situation.

The right life insurance cover is personal. It should be enough to reduce the financial disruption your family could face without placing unnecessary strain on your budget today.

If you would like help working through the numbers, personalised advice may help you compare different levels of cover and decide what is appropriate for your circumstances.

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Disclaimer

This article provides general information only and does not consider your personal circumstances, objectives, or financial situation.