Understanding Life Insurance
Be prepared for life’s emergencies
Imagine what your family’s life would be like if you or your partner died or became seriously ill and couldn’t
work. Would you be able to survive financially? Being unable to work as a result of an accident or ill-heath could expose you or your family to financial difficulty. Insurance can provide the money you or your family need in these critical times.
It is a good idea to review your life insurance regularly, especially if something has changed in your life, for example, if you’ve taken out a home loan, are having kids or starting a business.
Types of life insurance
There are different types of cover that fall under the broad heading of life insurance. Depending on your circumstances you may need one or more of the following:
- Life cover – also known as ‘term life insurance’ or ‘death cover’, pays a set amount of money when you die. The money will go to the people you nominate as beneficiaries on your policy.
- Total and permanent disability (TPD) cover – pays a lump sum to assist with rehabilitation and living costs if you are totally and permanently disabled. TPD is often bundled with life cover.
- Trauma cover – provides cover if you are diagnosed with a specified illness or injury. These policies include the major illnesses or injuries that will make a significant impact on your life, such as cancer or a stroke. It is sometimes called ‘critical illness cover’ or ‘recovery insurance’.
- Income protection – replaces the income lost through your inability to work due to injury or sickness.
How much life insurance do I need? There is no correct answer, but more insurance gives you more protection. However, it also depends on what you can afford, so you may need to prioritise.
To help work out the best level of insurance cover for you, consider:
- How much cash your family would have if you were to die or become disabled. How much money is in superannuation, shares, savings and existing insurance policies? How much paid leave do you have? What type of support could your family provide? You may also be entitled to government benefits or workers
compensation if you get injured (although this may be reduced by income protection claims).
- How much cash your family would need if the worst were to happen. Consider the size of your mortgage and any other debts, as well as childcare, education and other costs.
The difference between these is the amount of cover you should get. However, you may need to compromise between what you would like and what you can afford.
What’s the difference between stepped and level premiums?
Insurance premiums usually increase with age because the older you get, the more likely you are to make a claim. For insurance such as life, total and permanent disability, or trauma cover, you may be able to choose between stepped or level premiums.
Here is the difference between stepped and level premiums:
- Stepped premiums – Your insurance premium will increase each year as you get older but is usually cheaper in the beginning. If you’re thinking about this option, it is worth looking at what the premiums will be over the next 5 years, or however long you intend to hold the insurance for, to make sure you can afford the premiums.
- Level premiums – Your insurance premium does not change due to your age but is generally more expensive than a stepped premium in the beginning. Level premiums may increase over time due to inflation adjustments or changes to the insurer’s fees.
If you want to control your costs over time then level premiums may suit you. Premiums are usually higher in the beginning but much cheaper than stepped premiums when you are older. If you intend to hold the insurance for a long time, level premiums are likely to be cheaper in the long run.
Can I afford life insurance? One of the options available is life instance through your Superannuation fund. When you have life insurance through your superannuation account, the premiums for that insurance are deducted from your super accounts balance rather than out of your own bank account. It still costs you either way, but if you are at a stage of life that involves a home loan and family to raise then having the premiums deducted from your super account may make it easier on your cash flow.
I have life insurance in my Superannuation fund already, why do I need to speak to an adviser?
Most people have some form of life insurance included in their Superannuation account. What many don’t realise is that in the event of claim – especially income protection or TPD – the claim may be rejected as there has been no underwriting (guaranteed acceptance) for the amount insured potentially leaving your estate without compensation. A Financial Adviser will arrange to have your policy underwritten which will ensure in the event of claim, your insurance will be paid out.
Any advice provided in this publication should be considered General Advice as it does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate for you and whether you should act upon it.