By Philippa Billings, Head of Advice, Otivo
Most Australians' life insurance amount was chosen by a formula that has never heard of them. Default cover in super scales by age and nothing else — it doesn't know about the $650,000 mortgage, the two primary schoolers, or the plan for one parent to work part-time for a decade. Sometimes the formula lands close; mostly it's a guess wearing a decimal point. The needs test replaces the guess with an estimate built from the household's actual shape, and it takes ten minutes with a calculator. Here's the four-step version — what would need covering, minus what already exists, equals the number worth knowing.
A life insurance needs test estimates required cover by adding what would need funding if the insured person died — debts cleared, income replaced for a chosen period, children's costs — then subtracting existing resources like super balances, current cover, and savings. The gap is the indicative cover need. For many families the result exceeds default super cover, which is set by age-based formulas rather than individual circumstances.
Step one — what would need to be cleared?
Start with the debts that would outlive the person. The mortgage is usually the tower on the list — a household that could cover repayments on two incomes often can't on one, and clearing the loan is what keeps the family in the home while everything else stabilises. Behind it queue the car loans, personal loans, and card balances that would otherwise land on the surviving partner's single income. The clearing number is simply the sum of the balances — precise, findable in ten minutes of statements, and typically the largest single component of the need.
Step two — what income would need replacing, for how long?
The harder, more consequential estimate. The question isn't the deceased's full salary forever — it's how much of the household's running costs their income carried, and for how many years the family would need that carriage replaced. Common framings run from until the youngest child finishes school to a fixed span of ten or fifteen years, and the honest inputs are the household's actual essential costs, the surviving partner's realistic earning capacity through those years, and the childcare or support that capacity would depend on. Multiply the annual shortfall by the years, and step two is done — imprecisely, and far more accurately than any age-based default ever guessed.
Households where one partner's unpaid work is the income — the full-time parent whose death would force paid childcare, before-and-after care, and reduced hours on the earner — belong in this step too. Unpaid work has a replacement cost, and the needs test is where it finally gets counted.
Steps three and four — children's costs, minus what already exists
Step three adds the earmarked futures — education costs if the household intends private schooling, and any provision the family wants standing for the children beyond daily support. Step four turns the ledger around and subtracts everything already in place — super balances, which are paid to beneficiaries alongside insurance, existing cover inside and outside super, savings and investments that would realistically be applied.
A worked example, purely as illustration.
- Mortgage and debts to clear: $620,000
- Income replacement ($35,000 a year for 12 years): $420,000
- Education provision: $60,000
- Total need: $1,100,000
- Less super balance: $180,000
- Less existing default cover: $200,000
- Less savings applied: $20,000
- Indicative gap: $700,000
The gap is the headline. For families in their mortgage-and-children years it routinely lands well above the default cover sitting in super — the underinsurance pattern Otivo has examined before, rampant precisely because so few households ever run the ten minutes of arithmetic. The number also falls over time, as debts shrink, children grow, and balances build — which is why the test is a recurring appointment, not a rite.
What happens with the number?
It gets compared, then acted on proportionately. Compared against current cover — found in the super fund's insurance section and any policies held outside — the gap either reassures or instructs. Closing it can mean increasing cover inside super, where group premiums are often economical and paid from the balance, or holding policies outside it, with different tax treatment and definitions; many households blend both. Cover can also step down by design as the need declines, rather than paying for a static number forever.
Sizing the need against premiums, existing cover, debts, dependants, and retirement goals is exactly what Otivo's personal insurance module does — the needs test run with real inputs, as regulated advice under AFSL and Australian Credit Licence No. 485665 rather than a rule of thumb. Ten minutes with a calculator beats years of hoping — and a regulated version of the calculation beats both.
Frequently asked questions
Does life insurance through super pay out differently?
Benefits inside super are paid to the fund, then released to beneficiaries under super's rules — which makes valid beneficiary nominations part of the protection. Binding death benefit nominations, covered in Otivo's separate guide, give the trustee a direction rather than a discretion.
How often should the needs test be rerun?
At every structural change — new mortgage, new child, separation, a partner's income shift — and every couple of years regardless, since the inputs drift even when life feels stable. The test's answer has a shelf life; the method doesn't.
Is life insurance worth it without dependants?
The needs test itself answers this — with no one relying on the income and no debts that would burden others, the calculated need can be small or nil, which is information as valuable as a large gap. Cover for funeral costs or debts with guarantors are the common residual reasons.
Sources
- ASIC MoneySmart — Life insurance. moneysmart.gov.au/how-life-insurance-works/life-insurance
- ASIC MoneySmart — Life insurance calculator. moneysmart.gov.au/how-life-insurance-works/life-insurance-calculator
- ASIC MoneySmart — Insurance through super. moneysmart.gov.au/how-life-insurance-works/insurance-through-super
Disclaimer
The information in this communication is current as at July 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.