By Philippa Billings, Chief Advice Officer, Otivo
The oldest rule of thumb in life insurance is ten times your annual salary. It's memorable, it's easy to sell, and for a lot of Australians it produces the wrong number — sometimes by a quarter of a million dollars. The problem is that it's indexed to what you earn rather than to what you owe and who depends on it, and those are different things. For some people the honest answer is no cover at all. For others it's considerably more than ten times. Here's the calculation that produces a real figure, and what to check before you buy anything.
Quick answer
Life insurance cover is calculated from obligations, not income. Add the debts that would need clearing, the income a dependant would need replaced and any one-off costs, then subtract assets that could be converted to cash and any cover already held — commonly inside super. As at August 2026, the Financial Services Council estimates around one million Australians are underinsured for death and total and permanent disability cover.
Why doesn't ten times salary work?
Because salary is a proxy for the thing that actually matters, and it's a poor one. Two people earning $110,000 can have completely different needs: one with a $650,000 mortgage and two dependent children, the other renting, single, with no one relying on their income. The rule of thumb gives them the same answer.
Over-insuring isn't harmless either. Premiums are paid every year, usually rising with age, for cover that would never be claimed on. Under-insuring is worse, and it's more common — the Financial Services Council's research put around one million Australians short on death and TPD cover, and 3.4 million short on income protection, with more than one in five people aged over 35 underinsured on at least one measure.
The four-number cover calculation
Four numbers, in order. The first three add up, the fourth comes off.
- Debts to clear. The mortgage, plus any personal loans or card balances that would otherwise fall to the household. This is the number that turns a family home into a family home with no repayments attached.
- Income to replace. Decide how long, and multiply. If a partner would need $70,000 a year for five years while a business gets established or children reach school age, that's $350,000. The period is the judgement call; the arithmetic isn't.
- One-off costs. Funeral costs, any immediate expenses, a buffer for the months when nobody is in a state to be making financial decisions.
- What already exists. Assets that could realistically be converted to cash, plus any cover already held — including the default cover inside a super account, which many people have and few can name the amount of.
What does that look like with real numbers?
Take Ben, 36, earning $110,000. He and his partner have a home worth $900,000 with $650,000 still owing. Her income is irregular while she builds a business.
Debts to clear: $650,000. Income to replace: $70,000 a year for five years, or $350,000. One-off costs: $25,000. That's a total need of $1,025,000. Ben already holds $175,000 of default cover inside his super and has no other assets he'd want converted, so the gap is $850,000.
The rule of thumb would have given him $1,100,000 — $250,000 more than the calculation supports, paid for every year for as long as he holds the policy. Change one input and the answer moves: no mortgage, and the need drops below $400,000. No dependants, and much of it falls away entirely.
Otivo's personal insurance inside super module runs this calculation against your actual dependants, debts, income and existing cover, and shows what your fund already offers and what it costs.
What else sits alongside life cover?
Life insurance pays on death, and typically on diagnosis of a terminal illness, at which point the policy ends. It doesn't help with the far more likely scenario of being alive and unable to work. Three other cover types deal with that.
- Total and permanent disability (TPD) cover pays a lump sum if you're unlikely to work again in a role you're qualified for by education, training or experience. It's often used for medical costs, home modifications and clearing debt.
- Income protection pays regular monthly amounts to replace part of your income while illness or injury keeps you from working. Waiting periods and benefit periods vary widely and change the value of the cover considerably.
- Trauma cover pays a lump sum on diagnosis of specified serious conditions, whether or not you stop working.
Many super funds offer some combination of these as default cover, with premiums deducted from the super balance rather than take-home pay. Group rates can make that cheaper and simpler than arranging equivalent cover directly. The trade-off is that the premiums reduce the balance over time, and default cover amounts are frequently lower than people assume.
Frequently asked questions
What happens to cover if I consolidate my super accounts?
Closing an account generally ends any insurance attached to it, and that cover may not be replaceable on the same terms — particularly if your health has changed since it started. Checking what cover each account holds before consolidating is the step people most often skip, and it's the one that's hardest to undo.
Who receives a payout from cover held inside super?
Super funds generally allow you to nominate a beneficiary, and nominations can usually be made, amended or revoked at any time through the fund's nomination form. Tax treatment of a death benefit depends on who receives it and whether they're a dependant for super purposes, which is worth understanding before a nomination is made.
How often is cover worth reviewing?
Whenever the inputs change. A new mortgage, a new child, a partner returning to full-time work or a debt being cleared all move the calculation, sometimes by hundreds of thousands of dollars. Many people look at it once a year and after any of those events.
Is cover inside super always cheaper?
Often, but not automatically, and price isn't the only variable. Definitions, exclusions, waiting periods and whether cover continues if you change jobs all differ. ASIC's MoneySmart's guidance on life insurance has plain-English guidance on how the different cover types work and what to check.
Insurance is one of the few financial decisions where the right answer for someone else tells you almost nothing about the right answer for you. Otivo works from your own numbers, and the retirement planning module shows what the rest of the picture looks like alongside it. Otivo Pty Ltd holds AFSL and Australian Credit Licence No. 485665.
Sources
- Financial Services Council and NMG Consulting, underinsurance research, 2022.
- ASIC MoneySmart, Life insurance and Insurance through super.
- Australian Taxation Office, Tax on super death benefits.
- Otivo modelling, August 2026.
Disclaimer
The information in this communication is current as at August 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.