While the general rule of thumb throughout the finance industry is to take out between ten to thirteen times your annual salary, it is important to consider a needs-based approach when determining the right amount of TPD cover that will be enough to support your family financially. The amount of cover required can vary drastically between people, as they will have different needs and circumstances, so it is important to take your time to ensure you are not under or over insured.
Using a needs-based approach can help you determine the appropriate level of cover. The steps to calculate how much TPD cover you may need are as the following:
- List all the financial commitments your family have currently, from ongoing living expenses, children’s education expenses, bills and debts.
- Consider any future obligations that your family may have, i.e. your children’s higher education costs.
- Allocate an emergency fund to cover any unexpected costs, such as medical expenses, rehabilitation costs, nursing care and home and/or vehicle modification costs.
- Calculate the total costs of all of your commitments.
- Take into account your partner’s age, his/her capacity to earn an income, the number of children that you have and their respective age, to determine how long you may want to cover your family’s needs for.