How much life insurance do you need?

The size of your personal insurance benefit is a question of balance. Too large, and your premiums may become a burden (and tempt your family into bumping you off). Too small, and it may not cover your mortgage or living and school expenses.

How does life insurance work?

The policy is usually taken out by the life insured (you), and the benefit paid out in a tax-free lump sum to your nominated beneficiaries should you, regrettably, die while covered.

Other options are joint ownership— where you nominate, for example, your spouse as co-owner of the policy — and third party, where your life insurance is paid, eg, through your superannuation. (This allows you to salary sacrifice to pay premiums, but may involve tax payable on any benefits.)

  • Consult your financial advisor for details about tax liabilities and life insurance.

What else do you need to know?

While there's always a mass of life insurance fine print, here are some major features:

  • Total and permanent disability insurance. This is often packaged in with life insurance, and provides a lump sum payout if you're permanently unable to return to work. Any occupation means you can't work at all. Own occupation means you can't work in your current area (eg, a flautist who loses a hand).
  • Cover indexation. Inflation is currently 2.7%, which may not seem like much (or sound like total economicky nonsense), but over the course of a 20-year policy, the value of a payout could be dramatically reduced. You can opt to index your policy for a higher premium.
  • Funeral insurance. Some policies include a funeral benefit that pays an advance to cover funeral costs, so there are no sudden financial pressures.

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