Finding the Goldilocks zone for life cover (while hoping you’ll never need it)

OPINION: Personal finance is full of rules of thumb. These are rough rules that work for most people and give an approximate value that help you make a financial plan.

Of course, rules of thumb can never be trusted completely: they take no account of personal situations and although they may work reasonably for the average person, very few people are average.

A big question in personal finance has always been how much life insurance you should have.

Not too much but not too little – there is a sweet spot that is not wasteful but gives sufficient cover for the survivor.

Life insurance has a rule of thumb which says that you should insure your life to an amount equivalent to seven to ten times your income.

That would mean that someone earning $70,000 p.a. before tax would take out $490,000 – $700,000 of life insurance.

Nevertheless, for many this will not be the Goldilocks amount – it could be too much insurance or too little.

The problem with this rule of thumb is that it takes no account of debt. Most advisers think that life insurance should at least cover the debts that the survivor has – that is, the survivor has enough to repay all debt.

In fact, many banks work hard to ensure there is an insurance policy that at least sees the mortgage repaid on the death of a mortgagor.

However, even that amount is not enough for most people.

The purpose of life insurance is that any dependents will be cared for. This means that most of those without partners or children should not bother with life insurance (unless, perhaps, they have parents or other people dependent on them).

However, those who need insurance need the right amount.

I think the best way to think about this is that the survivor should have an amount to pay off all debt and, in addition, enough to be able to live for at least two years without having to worry about money.

For example, if a couple with children owns a home, their mortgage debt might be $500,000 and their annual expenditure perhaps $60,000 a year.

Such a couple would have $620,000 of life insurance. On the death of one of the couple, the survivor would be able to repay the mortgage ($500,000) and have two years without having to worry about earning an income ($120,000).

This two years without financial worry allows the survivor to grieve properly and to give full care and attention to the children (who will really need it!)

You always hope that life insurance turns out to be a waste of money.

However, sometimes life cover does not turn out to be a waste and, if the worst happens, life insurance makes all the difference to those who survive you.

Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at

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