How much should I spend on Life Insurance?

This is a bit of a “how long’s a piece of string” question, but let’s give it a go anyway.

Your insurance needs are going to be unique to you, there are a number of factors that will impact the amount of cover you need, the cost of that cover (including age, sex, lifestyle and medical history) and what your goals for the future are. All of those factors can have a huge impact on what you would pay, where as when you talk to your neighbor about your house insurance, you probably have a lot in common there.

 Let’s try to develop a guide.

Let's say we have a couple, Roger and Maree Rabbit, both 30 years old, non-smokers with 2 young children and a mortgage. These are the relevant factors to consider when figuring out their cover:

• Mortgage $800,000

• Both earn $80,000 per annum

• Children both over 5

Roger and Maree want $ 1,065,000 of Life Cover, Trauma and Income Protection. Looking at NZ’s 5 top insurers the Rabbits can expect to pay around $251 per month in premiums.

If they want to add Health Insurance to this for the whole family, you'd increase the monthly premiums to approximately $460.

Let's put these costs into perspective. They have a household income of $160,000, so for quality Life Insurances that's 1.9% of their income, and 3.4% when they add Health Insurance for the whole family.

Spending a small percentage of your income to make sure that you can protect that future income makes sense to me.

I have been doing this for years so with some educated guesstimation work this table could be used as a loose guide that may help many seeking cover for the first time (generally from late 20s to early 40s).

All of the above rely on a number of factors including that you are able to get your covers at Standard Rates. It is common for clients to end up with loadings on their accounts due to theirs or their families medical history, lifestyle (smoking, drinking, dangerous occupation and or activities), BMI amoung other factors. Basically double the above if you smoke, and pay it because the likelihood of needing to make a claim is so much higher.

These costs may go the other way, you may have some covers with your employer, or low debt and/or realisable assets (e.g. KiwiSaver) that mean you don’t need as much cover.

So, as you can see, comparing your premiums with your mates' is a bit of a waste of time. But, hopefully, this explanation can serve as a bit of a guide for you in the future.