How to calculate your life insurance need

Working out how much life cover you need is arithmetic, not judgement, until the very last step. The judgement is about how long you want the money to last and how conservative you want to be. The arithmetic is the same for everyone.

There are two schools. The multiple-of-income approach says take the main earner’s salary and multiply it by something between eight and twelve. It is fast, and it is wrong more often than it is right, because it takes no account of the size of your mortgage, whether your partner earns, how old your children are or what you already hold.

The needs approach adds up what actually has to be paid and subtracts what is already there. It takes ten minutes on the back of an envelope and it produces a number you can defend. That is the method below.

1. 1Debt to clear. Mortgage balance plus any other debt you would want gone — car loans, credit cards, a personal guarantee on a business loan.
2. 2Income to replace. Take the household income that would be lost. Multiply it by the number of years it needs replacing — usually the years until your youngest child is independent, or until your partner could reasonably support the household alone.
3. 3One-off costs. Funeral and estate administration, and a buffer for the year in which nobody in the household is functioning well enough to work at full capacity.
4. 4Care and household costs. If the person insured does unpaid work — childcare, running the household — cost the replacement of it. This is the step that is skipped most often and it is frequently the largest single line for a stay-at-home parent.
5. 5Subtract what already exists. Employer group life cover, any policy already in force, KiwiSaver balance, and liquid savings you would actually be willing to spend.
6. 6The remainder is your gap. Round it, sanity-check it against what you can afford to pay and keep paying, and take that to an adviser.

A worked example

A couple in their late thirties with two young children. One earns, one works part time. These figures are round illustrative numbers chosen to make the method readable — they are not a benchmark and they are not what you need.

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

• Employer group life ends when the job ends, so subtracting it assumes you will still be in that job.
• Ten-times-salary rules ignore the mortgage entirely, which is usually the largest number in the calculation.
• Indexation means the cover you buy today grows with CPI — the gap you calculate does not need to include future inflation twice.
• The number you can afford to keep paying matters more than the number you calculate. Cover that lapses protects nobody.
• Do the same exercise for both adults. Households routinely insure the higher earner and forget the other one entirely.
• Recalculate after a birth, a house purchase, a separation or a significant change in income.

Every New Zealand insurer writes what life insurance costs 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 runs this against real quotes, so you see what each level of cover actually costs before deciding.
• They will flag where the sum insured pushes you over an insurer’s evidence limits and triggers medical tests.
• They can split cover — part level, part stepped — so the mortgage portion falls away when the mortgage does.
• They will check the ownership and beneficiary structure, which decides how quickly the money reaches the family.

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.