How much life cover do you actually need? A NZ-specific answer

If you've ever sat with a life-insurance quote and wondered how anyone is supposed to know whether $400,000 or $1.4 million is the right figure, you're not alone. The answer doesn't come from a brochure — it comes from a fairly tedious bit of arithmetic about your household's actual financial position. This is the one we do, simplified for NZ.

Start from the gap, not the headline

The point of life cover is to close the gap between what your household has and what it would need if your income disappeared. Not to make anyone wealthy. Not to replicate your salary forever. Just to clear the major debts and fund the years when the surviving partner needs to keep the household running while raising children or transitioning back into stable income.

The four numbers to assemble

• Outstanding mortgage and other debt — the figure on your most recent statement, not what you originally borrowed.
• Annual household income — both partners, gross. (Net is more accurate but harder to forecast forward.)
• Dependants' future cost — children at home, plus any others you support. The rough NZ rule is around $250–350k per child to age 18, all-in.
• Liquid assets — KiwiSaver (yes, accessible at death), term deposits, shares, savings — anything that could be drawn down to plug the gap.

The plain-English formula

Most NZ advisers anchor sum-insured on a simple structure: outstanding debt + 10× household income, minus existing liquid assets and minus existing employer-group cover. Then a margin for raising children and education. The result is rarely round. Don't round it down because the higher number feels intimidating — under-insurance is the more common kiwi mistake by a wide margin.

Common NZ-specific traps

• Forgetting ACC: ACC covers accidental death and accidental disability — but not illness. If your worry is the heart attack or cancer that takes you out of income at 47, ACC will not help, and your private cover is what closes the gap.
• Double-counting employer-group cover: it's tempting to assume the workplace policy will plug the hole. It won't if you change jobs or get made redundant — group cover is generally not portable.
• Trauma cover treated as income protection: trauma pays a lump sum on diagnosis of a covered condition. It is not a substitute for income-protection cover, which pays a monthly benefit while you're unable to work.
• Sizing for today rather than ten years out: your kids will get more expensive, not less. The mortgage will fall, but slower than people think during the high-interest years.

Two short examples

Couple in Christchurch, both 33, two children under 5, $620,000 mortgage, household income $165,000, $90,000 in KiwiSaver between them, $20,000 cash. Plain formula: 620 + (10 × 165) − 90 − 20 = $2.16m of cover, split sensibly between the two earners. They might land on $1.2m on the higher earner and $900k on the lower earner — close enough.

Single parent in Wellington, 41, one teenager, $310,000 mortgage, salary $115,000, $145,000 in KiwiSaver. Formula: 310 + (10 × 115) − 145 = $1.315m. They'd likely also want a focused income-protection benefit because — no second income to fall back on — covering the gap between any insurance payout and the surviving teenager's adult life is the most serious exposure.

When to stop adding zeroes

Cover that you can't afford to maintain isn't cover — it's a temporary illusion until your premiums lapse. The right number is the one you'll still be paying willingly in eight years' time. A good NZ adviser will pull you back from over-insurance as readily as they push you off under-insurance.