How Much Life Insurance Do I Need? A Simple NZ Guide
"How much life insurance do I actually need?" is one of the first questions people ask us, and one of the most important. Too little and your family could still face money worries. Too much and you're paying premiums for cover you don't need. Here's a simple way to work out the right number.
Start with the question life insurance answers
Life insurance pays a lump sum if you pass away (and with many policies, if you're diagnosed with a terminal illness). The real question isn't "how much is a life worth?" It's this: what would your family need financially to keep living the life you've planned together?
For most Kiwi households that comes down to four things.
1. Clearing your debts
Add up what you owe: the mortgage, car loans, personal loans, credit cards, student loans. Paying these off means your family keeps the home and isn't left with repayments on a reduced income.
2. Replacing your income for a while
If your partner and children rely on your pay, think about how many years they'd need support. A common approach is to cover your after-tax income until your youngest child finishes school, or for a set number of years to give your partner time to adjust.
3. Future costs you've planned for
School and university costs, childcare if a stay-at-home parent needs to return to work, or helping an elderly parent. Write down anything you'd want taken care of.
4. Final expenses
Funeral costs and any immediate bills while your estate is sorted out.
Then subtract what's already there
Take away the resources your family could draw on:
- Savings and investments
- KiwiSaver balances (paid to your estate if you pass away)
- Existing life cover, including any through your employer
- Your partner's income, if they'd keep working
The gap between "what they'd need" and "what they'd have" is a good starting point for your level of cover.
A worked example
Here's an illustration only. Every family is different.
| Need | Amount |
|---|---|
| Mortgage | $550,000 |
| Car loan and credit card | $25,000 |
| Income support: $45,000 a year for 5 years | $225,000 |
| Children's education fund | $40,000 |
| Final expenses | $15,000 |
| Total need | $855,000 |
| Less savings and KiwiSaver | −$85,000 |
| Suggested cover | About $770,000 |
Tip: Don't forget the stay-at-home parent. If they passed away, the other parent might need to pay for childcare or reduce their hours. That has a real cost, even though there's no salary to replace.
Things that change the answer
- Your age and stage. Young families with a big mortgage usually need the most cover. As debts shrink and children leave home, many people can reduce their cover and save on premiums.
- Other cover you hold. Trauma, income protection and mortgage repayment cover all work alongside life insurance. Getting the mix right can be better value than one big life policy.
- Premium structure. "Stepped" premiums start cheaper and rise with age; "level" premiums cost more at first but stay steadier. The right choice depends on how long you expect to hold the cover.
Review it as life changes
The right amount today won't be right forever. A new baby, a bigger mortgage, a pay rise or paying off the house are all good reasons to check your cover still fits. See 7 life events that mean it's time to review your insurance.
If you'd like help running the numbers for your family, we're happy to do it with you. It's free, and there's no pressure to buy anything.
Want a second opinion on your cover? Book a free, no-obligation chat with AFA Insurance. We compare policies from a range of New Zealand insurers and explain your options in plain English. Call 021 985 218 or book online.
This article is general information only and is not personalised financial advice. It doesn't take into account your objectives, financial situation or needs. Policy features, definitions and limits vary between insurers and change over time, so always read the policy wording and talk to an adviser before making a decision. Financial advice is provided by AFA Insurance advisers under the licence of Certainty Financial Advisers Network Limited (FSP677951).