Life insurance is not for you; it is for the people who depend on you. It pays a lump sum to your family or estate if you die, so that your death does not also become a financial disaster for those you leave behind. The hard question is not whether to have it, but how much. Too little leaves your family short at the worst possible time; too much wastes money on premiums you did not need. Getting the amount roughly right is what this guide is about.
The need for life insurance depends entirely on who relies on your income or care. The more people depend on you, the more cover matters.
DIME is a simple checklist of the four big things life insurance usually needs to cover. Adding them gives a solid starting figure.
| Letter | What to include |
|---|---|
| D — Debt | Credit cards, car loans and other debts to clear |
| I — Income | The income to replace, for the years your family needs it |
| M — Mortgage | The remaining home loan to pay off |
| E — Education | The cost of raising and educating your children |
Replacing your income is usually the largest part. Decide how much your family would need each year without you, and for how many years, for example until the children are independent. Multiply the two for a rough income-replacement figure. Clearing the mortgage is often included separately so the family keeps the home outright.
A funeral is a real and immediate cost, and a small buffer gives the family breathing room to adjust without rushing decisions like selling the house. Including these avoids leaving your family scrambling in the first weeks.
Use our Life Insurance Calculator to estimate your cover, and the Cost of Raising a Child guide for the education piece.
The total need is only half the calculation. Your family would not start from zero, because you likely already have resources that reduce the gap. Subtracting these stops you over-insuring and paying for cover you do not need.
Your need is not fixed. It rises with a new baby or a bigger mortgage, and falls as the mortgage shrinks and children become independent. A figure set years ago may now be far too high or too low, so revisit it whenever your circumstances change.
| Life event | Effect on cover needed |
|---|---|
| New child | Increases the need |
| Bigger mortgage | Increases the need |
| Mortgage paid down | Reduces the need |
| Children independent | Reduces the need |
The trap: Picking an amount that sounds about right with no calculation.
Why it costs: You can easily be far too high or too low. A quick DIME calculation gives a far better figure for little effort.
The trap: Insuring the full need while ignoring savings, KiwiSaver and a partner's income.
Why it costs: You pay premiums for cover you do not need. Net off what you already have to find the real gap.
The trap: Never reviewing the amount after big life changes.
Why it costs: You may be badly under-insured after a new baby, or over-insured years later. Review after every major change.
The trap: Covering just the home loan and ignoring income replacement.
Why it costs: Clearing the mortgage helps, but your family still needs day-to-day income. Include income replacement, not just the debt.
Use the Life Insurance Calculator to estimate cover, the Income vs Mortgage Protection guide for living cover, and the Stepped vs Level Premiums guide for pricing.
Final word: The right amount of life insurance is the cost your family would face minus what they already have. Use DIME to add debts, the mortgage, income replacement and children's costs, then subtract savings, KiwiSaver, existing cover and a partner's income. Buy the gap, not a guess, and review it as your life changes, since the need usually shrinks over time. This is general information, not personalised insurance advice, so talk to a licensed adviser about your own situation.
Quiz on Life Insurance Needs (20 Questions)
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