How much Life Insurance should I have?

In a recent survey, when asked what level of life insurance people think is recommended:

• 30% selected "over 10 times a year’s salary" (which is the amount recommended by the Investment and Financial Services Association (IFSA))
• 34% selected "between five and ten times salary"
• 22% selected "between two and five times a year’s salary"
• 9% selected "between one and two year’s salary"
• 5% selected "one year’s salary"

Surprisingly, the results were almost identical for people with and without life insurance.

How much life insurance do people have?

One major Australian insurance company recently reported the following average levels of insurance across all their clients

Considering the average wage in Australia is now $60,658 per annum, according the Australian Bureau of Statistics, it seems that this insurers customers aren’t far off 10 times their income on average. But how reliable is the "10 times income" formula?

How do you calculate sums insured?

The three most popular methods used to calculate sums insured are as follows:

The Multiple of Income method

The best thing about this formula is that it’s simple to calculate. But is does not consider an individuals personal circumstances, such as age, dependants, and debt levels, which are obviously important things when it comes to their future financial needs. So, this method can easily lead to over or under insurance.

Income multiplied by number of years to retirement method

Again, simple to calculate, but still does not consider individual factors.

Individual Circumstances method

This method takes into account personal ongoing income needs, adds the cost of debt elimination, adds a hypothetical figure for expenses associated with a disability and subtracts assets that would be converted to cash.