If you’re a bit confused about how much insurance cover you need in your life, look no further! Adelaide accountant Kym Nitschke discusses the fundamentals you need to know in determining the amount of cover you need.

“How much insurance cover do I need?”

This is a common question for people to ask when they contemplate taking out personal insurance. If you’re reading this, then you’re likely one of them. A lot of factors come into play in determining how much cover you’ll need.

Calculating Income Protection

Income protection is the simplest to calculate. Insurers will generally pay you 75% of your current income per month. You have the option to take out either an agreed or indemnity policy.

What are the differences between these policies?

Indemnity value cover is:

– Based upon your income at the time you make your claim

– Usually much lower in cost than agreed value cover

– Best for people with a stable income that is only likely to rise.

Because indemnity is based upon your current income, you’ll need to provide proof of your income when you make the claim. The insurer will look at your average monthly income for a number of consecutive months over the past 2 or 3 years up to the point of filing your claim. The 75% amount of cover is based on this average.

Agreed value cover is:

– Determined by your income at the time you apply for the policy

– More expensive than indemnity because it guarantees greater security

– Ideal for those with a fluctuating income (eg. freelancers and small business owners)

The amount of cover is generally based on the average of your last two Tax Returns.

Other Important Coverage

There’s basically no right or wrong answer as to how much Life, TPD and Trauma cover you’ll require. You simply need to contrast how much you will require with how much you can afford.

The four areas you should consider are:

– Current and future income

– Dependents (do you have children or other financial dependents? Will they be cared for?)

– Debts (mortgage, loan etc.)

– Assets (value of your assets such as house, shares, superannuation, motor vehicles)

Firstly, you need to consider how much cash/assets you will have if something does happen to you. Your assets include: cash in the bank, superannuation, shares, and existing insurance policies (including ones attached to your superannuation policy).

You should next think about how much cash you will need to cover your current lifestyle if you are unable to work, or even cover your debt in the unfortunate event of death. Things to consider here include: your current mortgage, school fees for your children and your family’s daily living and medical expenses. You will also need to allow for inflation.

The difference between how much you have and how much you require is about what you would need to take out in insurance. This will be adjusted, of course, to account for how much in premiums you can afford.

A professional adviser will be able to help you determine what is right for you. Get started by calling the Adelaide office of Nitschke Nancarrow on (08) 8379 9950 or sending me an email.

– Kym Nitschke

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