How Much Life Insurance Do You Actually Need in Australia?

🧮 The quick formula most people start with🔗

The simplest rule of thumb going around is 10 times your annual income. Earning $90,000 a year? Start with $900,000 in cover. Earning $120,000? Think $1.2 million.

Worth being upfront about this one: it's a commonly cited shortcut used by financial commentators and comparison sites, not an official standard from ASIC or any licensed adviser body. Treat it as a sanity check, not a final number.

It falls short on its own because it ignores:

• The size of your mortgage
• How many dependants you have and how young they are
• Whether your partner earns an income or would need to re-enter the workforce
• What you already have in super, including any default cover
• Your existing savings and investments

Think of 10x as the floor, not the ceiling.

📐 A more structured way to think about it🔗

One framework you'll sometimes see referenced is DIME, short for Debt, Income, Mortgage, Education. It started in the US and isn't a formal methodology used by Australian licensed adviser bodies, but the underlying logic maps closely to what MoneySmart's own calculator does: add up what your family would need to cover, then subtract what they'd already have access to.

Here's how that logic plays out for a realistic example. Meet Priya, 38, earning $95,000 a year, with a $450,000 mortgage and two kids aged 6 and 9.

That's a big number, and it's exactly why picking a round $500,000 policy without doing the maths leaves a lot of families badly exposed.

MoneySmart's life insurance calculator uses a very similar approach: it adds up funeral costs, mortgage, other debts, children's education, and ongoing living costs, then subtracts your available assets, including super. It's the best free, government-backed tool available and takes about 10 minutes.

📋 What to actually include🔗

Go through each of these carefully. Missing even one creates a real gap.

Outstanding debts: mortgage (the big one), car loan, credit cards, personal loans. HECS/HELP is wiped on death, so it doesn't belong here, more on that below.

Income replacement: how many years does your family need support for? A common benchmark is until your youngest child turns 18. If your partner isn't currently working, or would need retraining to re-enter the workforce, extend that window.

Funeral costs: Australian funerals typically cost somewhere between $4,000 and $15,000, according to MoneySmart, depending on the type of service and location. A basic direct cremation can come in well under $5,000, while a full burial service in a capital city can push past $15,000.

Children's education costs: if you're planning on private schooling, factor in fees, uniforms, and extras. Government schooling is cheaper but still carries ongoing costs.

What to subtract:

• Super balance, your family can access this on your death
• Existing life cover inside super, check your latest member statement
• Savings and investments
• Investment property equity, if your family would actually sell it

💡 A worked example: putting it all together🔗

Meet Daniel, 40, earning $100,000 a year, with a $500,000 mortgage, two kids aged 8 and 11, $120,000 in super, and $200,000 in default life cover through super.

Daniel's default super cover of $200,000 covers roughly 15% of his actual need. That's the underinsurance problem in a single row.

⚠️ Why most Australians get this wrong🔗

Independent industry research has repeatedly found that most Australians hold nowhere near the cover they'd actually need, particularly for income replacement, which is usually the single biggest and most commonly underestimated component of the whole calculation.

There are three reasons this keeps happening.

Default super cover is a starting point, not a plan. Most super funds automatically provide some life insurance, but the amount is set by the fund, not by your actual financial obligations. A 35-year-old with a $600,000 mortgage and two kids might have $150,000 in default cover, a $450,000 gap before you even count income replacement.

Cover doesn't grow with your life. You take out a policy at 30 with a $400,000 mortgage. By 35, you've refinanced to $550,000, had a second child, and got a pay rise. Your cover hasn't changed. The gap has quietly grown.

People underestimate income replacement. The mortgage is the obvious number. Replacing years of income for a family is usually the largest single item in the whole calculation, and it's the one people most often leave out.

❌ Common mistakes🔗

• Picking a round number without calculating. "$500k sounds like a lot" is not a methodology. Run the numbers.
• Forgetting to subtract existing super cover. You might already have $200,000 in default cover. That counts, check the actual figure on your member statement.
• Not reviewing after major life events. Marriage, a new baby, a bigger mortgage, a divorce, a salary jump. Any of these materially changes your cover needs.
• Over-insuring. No dependants, significant assets, no debt? You may not need life insurance at all. Paying for cover you don't need is just wasted money.
• Ignoring HECS/HELP entirely. It doesn't pass to your estate, but it does reduce your take-home pay while you're alive, which affects how much your family relies on your income.

📅 When to review your cover🔗

Set a calendar reminder. Review your cover amount whenever any of these happen:

• You get married or enter a de facto relationship
• You have a child, or another one
• You take on a new or larger mortgage
• You get a significant pay rise
• You separate or divorce
• You start or buy a business
• Your youngest child turns 18, you may need less cover
• You pay down a large chunk of debt, or your super balance grows substantially

MoneySmart's calculator is free and takes about 10 minutes. There's no good reason not to run it every couple of years.

❓ Frequently asked questions🔗