Just how important is life insurance?

Everyone needs to plan for the accidents of life for their family's and their own wellbeing

Let's face facts. We're all going to die some day. While we may hope that day is a long way off, the reality is that accidents happen and people get sick, so sometimes the day comes sooner than we expect.

You need to ask yourself, if that does happen how will your family cope financially?

"If you have dependants, then life insurance is important as that ensures they have a better chance of being able to survive financially," says Susan Jackson, executive director of the Women's Financial Network. "Money won't replace you but it does help to make life a bit easier."

Damien Mu, general manager, life insurance, for AIA Australia, agrees.

"Life insurance is an important component for the overall financial protection of your family," he says.

Yet life insurance is a topic most people don't want to think about - let alone talk about - and it is often put in the too-hard basket.

"When I find clients trying to duck the conversation, I use a very simple technique of asking one of them to pretend they are now deceased and then I ask the other person what they now want to do with their finances given the death of the other," says Jackson.

"Invariably, if there is insufficient funds, the remaining person starts to talk about having to sell the home, take kids out of school ...

"The pretending deceased partner usually starts to interrupt and make suggestions but I remind them they are no longer part of this family and cannot therefore contribute to the discussion. It's always amazing how quickly they are then extremely happy to start talking about how they can best protect their family in the future."

This is definitely an exercise worth trying.

A common misconception is that you have life insurance as part of your super fund so you don't have to worry about it. But is it is really enough? It's worth contacting your super fund to find out the level of life insurance you already have.

Holly Dorber, senior insurance policy manager at the Financial Services Council, says 95% of Australians don't have the right level of insurance.

So how do you work out how much you need? Jackson says the amount required will depend on your circumstances, but usually you want enough to pay out any debt, cover funeral costs and ensure the family has sufficient cash flow.

"The best way to work is to look at what funds your family would need if your salary or wage was suddenly gone - how would they pay the mortgage, household bills, future education, etc," she says. Mu says it's important to think about your future expenses and not just your immediate debt.

The general rule of thumb is seven to 10 times your annual salary, says Dorber, who is also campaign manager at Lifewise.

That said, even if you don't earn an income - for example, you're a stay-at-home mum - you should still have life insurance. Dorber points to the calculator on the Lifewise website to help you work out how much you need. There are also other online calculators available.

AIA's Mu says a financial adviser can help you work out the right level of cover or you can contact your super fund, which will have tools that can help.

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