The ten times salary rule

The ten times salary rule is exactly what it sounds like: take the main earner’s gross annual income, multiply by ten, insure that. It circulates widely because it is easy to remember and produces a number that is usually in the right order of magnitude.

It comes from the United States, where employer-provided cover is common, there is no accident compensation scheme, and household debt is structured differently. Imported into New Zealand it keeps the simplicity and loses the fit.

The deeper problem is that it uses the wrong input. Your salary is not what your family loses if you die — what they lose is your contribution to the household after tax, for as long as they would have relied on it, plus whatever debt was being serviced by it. Two households on identical salaries can have completely different needs depending on their mortgage, their children’s ages and whether the other partner works.

Notice that the errors run in both directions. The rule is not simply conservative — it is arbitrary. It over-insures the people with the least need and under-insures the people with the most, because the variable it keys off is the one least connected to the size of the loss.

If you want a shortcut that works better

Add your outstanding debt to the number of years until your youngest child is independent multiplied by your after-tax contribution to household costs, then subtract what you already hold. That is barely more work than a salary multiple and it uses the numbers that actually determine the answer.

These are the details that decide whether the cover does what you expected. Read them before you compare on price.

• Whether the multiple is applied to gross or after-tax income. The difference is large and the rule never says which.
• Whether it is being used to justify a sale rather than to start a conversation.
• Whether your mortgage has been counted at all, since the rule does not include it.
• Whether both partners have been considered, or only the higher earner.
• Whether existing employer cover has been subtracted.
• Whether the resulting premium is one you would still be paying in twenty years.

Every New Zealand insurer writes how much life insurance do you need to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• An adviser works from liabilities and dependants rather than a multiple, and has to record the reasoning.
• They will tell you when the honest answer is less cover than you asked for, which a rule of thumb never does.
• They can test the number against what financial underwriting will actually support.
• They can split the recommendation across covers, so the money goes where the risk actually is.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.