Life insurance: How to work out if you need it
It’s a subject everybody wants to avoid and a key reason Australians are underinsured. But getting life insurance can be simpler and cheaper than many expect.
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Nobody likes to think about death, disability or illness, even in a year when it’s shoved down their COVID-tested throats.
It’s a key reason why Australia has an underinsurance problem, with families often unprotected financially if one of the breadwinners dies or becomes incapacitated.
However, getting adequate life insurance can be simpler and cheaper than many people expect. In many cases it can be bought or upgraded without any drain on a household budget, while in others it can deliver a handy tax deduction.
The first step in working out what your family needs is to understand that life insurance is an umbrella term for four different types of cover:
• Term life, or death cover;
• Total and permanent disability insurance;
• Trauma cover;
• Income protection insurance
Each serves a different purpose, with different premium and payout structures, and all but trauma cover can be held within superannuation where your employer’s contributions to super pay the premiums rather than your personal bank account.
Life insurer NobleOak’s chief executive officer, Anthony Brown, says there are many free tools available to help people work what cover they need.
“Search ‘life insurance calculator’ online,” he says.
Brown says a key question to ask yourself when considering cover is what your spouse would do if you weren’t there.
“Even if my spouse currently works, will they be able to work while looking after the children if I’m not around, or would they need to hire someone?” he says.
Recent changes to superannuation and insurance laws stripped automatic life insurance from super accounts holding less than $6000 and for new accounts of super fund members aged under 25.
Brown says this will widen the gap between how much life insurance some Australians have and how much they should have to protect their family financially.
“There is an underinsurance problem and the problem is probably going to get bigger in the next couple of years,” he says.
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Perks Private Wealth life risk specialist Pete Edmonds says a good strategy when working out life insurance needs for people is to “bring them back to the same financial position as if the event never occurred”.
“Upon death you want to ensure there’s no debt on the family home,” he says.
“We want to ensure children’s future education is funded, particularly if there’s private school.
“We also need to understand family needs, particularly if the main income earner dies and the income stops.”
Edmonds says Australians are generally underinsured, and may be surprised by how much financial backup would be needed to pay for debts, education and living costs.
“People fall into a false sense of security that they have insurance in super and they will be OK financially,” he says.
“But it’s just a default level of cover. For people with a mortgage and young children, the starting point is often $1 million.”
Edmonds says insurance products can differ widely between providers.
“Everybody’s situation is different so seek advice,” he says.
“Don’t make decisions based on price alone. What you pay for is what you get.”
ASIC’s Moneysmart.gov.au life insurance calculator can help you work out if you need life insurance, how much cover you might need and the expenses it will pay for.
ASIC senior executive leader Laura Higgins says insurance can help people with partners and beneficiaries.
“If you don’t have a partner, or people who depend on you financially, you may not need life cover,” she says.
“Think about what your family or dependants will need. Think about how your family’s needs can be covered by other sources such as your super, savings, investments, your paid leave balance, and support from your extended family.”
Moneysmart also has a handy life insurance claims comparison tool, which shows acceptance rates, claim times and disputes for a wide range of insurers both inside and outside of superannuation.
“To make sure you’re not underinsured, or over-insured, review your cover each year at renewal time,” Higgins says.
“And check what cover you’re getting through superannuation.”
THE 4 TYPES OF LIFE INSURANCE
1 Term life, or death cover pays a lump sum to your family or estate when you die.
2 Total and permanent disability (TPD) insurance pays a you a lump sum if you are permanently incapacitated and can help with rehabilitation and living costs.
3 Trauma insurance pays out if you are diagnosed with a major illness such as cancer, heart attack or stroke.
4 Income protection insurance pays a large portion of your income if you cannot work because of illness or injury, and premiums can be tax deductible.
WHAT TO CHECK
Life insurers must give you a product disclosure statement (PDS) before you buy. Here’s what to look for:
• What’s covered and what’s excluded under the policy.
• What information you’ll need to give an insurer.
• Information on premiums and how they change over time.
• Waiting periods before you make a claim.
• How to make a claim.
• How to complain about the claims process or decision.
• Whether you already have life insurance through your super, to ensure you’re not paying for insurance twice.
Source: Moneysmart.gov.au