Ask Paul: How do I work out how much insurance I need?

Hi Paul,

I have just done a review of our super and changed providers.

But I am wondering how to evaluate what insurance amounts (TPD, income protection, death cover) we need. Do you have any guidelines to work from? - Mark

Yep, let's run an unbiased eye over this important issue. Pretty obviously the key is not to have too little or too much.

Let's do the hard bit first, Mark. TPD, or total and permanent disability, is complex. It should not be, but we get down to the definition of exactly what this is defined as. TPD fine print can be a nightmare.

Some policies I have seen come with a shipping container amount of detail, most of it trying not to pay you. I appreciate that an insurance company makes money by collecting premiums and not paying out too much, but that is of little interest to you. So, you need to know under what condition you will be paid. Here a really good broker can help.

The worst of all scenarios is that you are severely disabled, and in need of constant medical help, changes to your home, home assistance and so on. I am not sure you can ever have too much cover for this. But the actual cost is really hard to calculate. It all depends on the nature of your disability. It is as much hope as science.

The critical factor is a plain-English policy so you get paid if it is needed.

Income protection is a bit easier; it will generally be around 80% of your salary, plus CPI, to around age 60 or 65. You need to understand under what conditions you will be paid and what your insurer can insist you do. For example, is "any job you can do" in the policy or is it "the exact job you were working in". Again, a professional broker could be helpful here.

Death insurance is a lot easier. If we are dead, we are dead. Not too many arguments here! Just take a look at any debts and your family's cost of living and I think you will pretty quickly come up with a sensible number. At your age, death insurance is cheap, so a little too much is a pretty safe plan.

The key parts of TPD and disability, though, are the policy terms. This needs your time and attention. If you do go to a broker, go to an independent one who can run you through various policy conditions.

Finally, good on you for your question. Too few of us take insurance seriously enough.

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