What is Life Insurance - A guide to Selecting the Best Life Insurance


We all live in hope that we will always be able to provide for our families, unfortunately life frequently delivers the unexpected, which often threatens our ability to provide financial security. Having a plan to navigate through these unexpected and difficult circumstances can offer significant peace of mind and ensure your family’s lifestyle is protected.

Many Australian’s do not have appropriate plans in place for these unexpected events, evidenced by the many whom have levels of life insurance which will not even cover paying out their home loan should they die, let alone provide funds to their families to provide for their future.

Life insurance is central to a sound financial plan as it is designed to provide the peace of mind that your family’s lifestyle will be protected when you’re no longer around or unable to work, due to sickness or injury.

To understand if life insurance is relevant to you try answering the following questions:

How would you cope if you fell ill or suffered an injury that prevented you from earning an income?

  • Would you and your family have sufficient income to cover the repayments on any debts?
  • If you have a family, what monthly income would you need to cover the expenses?
  • How would you and your family maintain your current lifestyle?
  • How long could you maintain your lifestyle, or simply cover your expenses using your existing assets?

If you are one of the many Australian’s who found it hard to answer these questions you should consider the options available to protect you and your family through Insurance. Life Insurance can provide the money that you or your family need in critical times. It may not take away the pain of losing a job or a loved one, but it will ease the added pain of financial problems.

 

Types of Life Insurance

There are four main types of life insurance cover:

 

1. Term Life Insurance

Life insurance protects your family by providing a lump sum payment to them upon your death or following diagnosis with a terminal illness from which you will die within 12 months. The lump sum payment is intended to help your dependents clear any debts that you may have together, whilst also providing for the future needs of your partner, and any children you may have.

The ultimate purpose of Life Insurance is to enable your family to the live the life you had planned.

If you have no, or insufficient life insurance the impact on your family, should you pass away can be significant and include:

  • Selling the family house to move to a smaller property to ease the financial pressure
  • Moving your children from their current private school to a state school
  • Increasing reliance on friends and extended family for financial support.

 

Total and Permanent Disability Insurance (TPD)

A permanent illness or injury would inevitably disrupt your life in many significant ways for many years. If you have no, or insufficient insurance to cover these eventualities, this disruption of your life could be further compounded by financial pressures.

Total and permanent disability insurance is designed to ease the financial pressures associated with permanent disability, through the payment of a lump sum.. In general terms permanent disability is considered to be a condition where you are disabled in a manner which will prevent you from working again, it’s important to check with each of the insurance providers as they all have slightly different definitions of this. The majority of Total and Permanent Disability Insurance policies provide a lump sum which can be used to cover any immediate medical expenses, outstanding debts with the remainder coving your furture needs for the remainder of your life.

 

Selecting a Total and Permanent Disability Insurance Policy

When reviewing the available TPD Insurance policies consider these key features of the policies early in your process:

  • The Policies definition of TPD - Each TPD Insurance provider has their own definition of total and permanent disability, it is important you are comfortable with the definition of your preferred provider.
  • What Occupations are covered? - A key difference between policies is that some will pay out if you are unable to perform the tasks associated with your stated occupation whilst others will pay out iy you are unable to perform any occupation to which you are suited.
  • Linking your TPD Insurance with your  life insurance - This is a common approach as it is generally a more cost effective approach to purchasing TPD Insurance when compared to purchasing it in isolation.
  • Including a Buy-back option - If you link your Life Insurance and TPD Insurance policies this option becomes available.. If you make a TPD Insurance claim, a buy-back option enables you to increase your life insurance sum insured by the amount that you have claimed.

 

Trauma Insurance

Trauma insurance is similar to Total Permanent Disability Insurance as it is designed to provide a lump sum of money due to illness or injury. The key difference with Trauma Insurance is that the impact of the injury or Illness does not need to be permanent, plus trauma insurance policies may also cover specifically defined events, examples include if you are diagnosed with cancer or have a heart attack but are not terminally ill or permanently disabled from these events.

As a basic guide, a trauma insurance policy may be used to:

  • Provide a lump sum to cover immediate medical expenses
  • Repay any personal debts
  • Provide a cash sum to help you transition through your illness.

 

Income Protection Insurance

Income protection is designed to insure you for a fixed level of your income (generally 75% of your gross salary) for a fixed length of time. Should you be unable to work due to illness or injury, your income protection insurance will continue to pay you at the agreed level over the agreed time period.

Selecting an income protection policy

When reviewing the available Income Protection policies consider these key features of the policies early in your process:

Waiting period - This is the period of time that you must not be working before the insurance provider will commence paying the agreed payments, waiting periods tend to be between 2 weeks and 2 years. When deciding the length of waiting period for your policy it is important to assess how long you could afford to be without any income, relative to your monthly expenses. In general terms the shorter the waiting period you choose the  greater the impact on the cost of your income protection insurance policy.

Payment period - This is the period for which the income protection policies will continue to cover your lost salary, with the duration of the period being  decided by you at the point of application.. The option exists to select a fixed period of time such as 2 or 4 years or alternatively choose to have payments continue until a stated age, say 65. In terms of impact on your Income Protection Policy, the longer the Payment Period you select the greater the cost.

The good news on Income Protection is that, unlike other types of personal insurance, income protection payments paid by you personally are a tax-deductible expense.

 

How much does Life Insurance cost?

The cost of life insurance is determined by a range of factors, some of which you can influence and some you cannot, the primary factors are considered here:

  • Your Gender: Men and Women are treated quite differently when the cost of personal insurance is being calculated by the Insurance Companies. In general terms men tend to pay more for term life insurance, for example, whereas women’s income protection insurance tends to be more expensive. These male female price differences are based on life expectancy and a range of risk factors that the insurance provider deems to be relevant.
  • Your age: Your age and associated life expectancy is one of the major influencers on the cost of your personal insurance products.
  • Your current and family medical history: The cost of personal insurance is heavily based on the propensity of you making acclaim in future years so evidently your medical history and health is a critical to this calculation.
  • Your occupation: The Insurance Providers rate each occupation in terms of the potential risks of injury, death or illness associated with carrying out the role, often using historical statistics to validate this rating. The more risk associated with your occupation the higher your premiums.
  • Your hobbies: If you participate in hobbies whish are considered hig risk by the insurance providers they will include this in their calculation of their premiums. So if you are a keen sky Diver expect your premiums to be on the higher side.
  • Smoking: Given the known impacts of smoking on our health smokers face insurance premiums that are often double those of non-smokers

Quitting smoking can lead to a reduction in your insurance premiums, but any relapse will cancel these reductions. To be considered a non smoker by the insurance providers you will need to have not smoked for a continuous period of 12 months, with no breaks.

  • Your weight: Health statistics suggest that close to 60% of Australians are clinically obese, that’s about 12 million of us.  Obesity has a significant impact on the risk of injury and suffering from a range of chronic diseases, so not surprisingly overweight Australian tend to pay higher premiums on their personal insurance.

 

How much life insurance do I need?

The amount of life insurance that you need you will be influenced by a broad range of personal and lifestyle factors, a good starting point is to think through these 5 primary requirements:

  1. How much will I require to repay my current debts, including any outstanding mortgages, loans and credit card bills.
  2. How much will be needed to cover the short-term expenses as I transition from being a full time worker.
  3. What are your plans for the future and what will these plans cost?
  4. If I loose the ability to work how much will I need to cover the cost of lost income?
  5. How much will be needed to cover my medical expenses and any modifications I may need to make to continue to live an independent live, e.g. changes to our home and car.