Finance Your Budget Should life insurance be on your radar?
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Should life insurance be on your radar?

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It’s an unsettling thought, but one that lies at the heart of life insurance. What would your family’s life be like if you became seriously ill, couldn’t work or – heaven forbid – passed away?

Would they have enough to survive financially and make ends meet? Would your partner be able to take care of the children and cover expenses like education?

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Questions about death are an unfortunate but necessary part of life as you get older. That’s when life insurance becomes an important thing to consider. But like other financial matters, it pays to be well informed, or at least understand the questions you need to ask, to ensure you’re getting the right cover.

So how should you go about it?

Do you really need it?

Insurance specialist Nancy Peat, of the Shadforth Financial Group, recommends that people weighing up life insurance should first consider their personal circumstances, including how much they can afford and any debts they have.

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Ms Peat proposes a sensible, albeit unpleasant, way of deciding whether a policy is right for you can be to imagine if you had died yesterday and whether your family could survive financially in the aftermath.

“The time to think about it is before the fact because otherwise it can be too late,” she says.

LifeInsurance2Where to get it?

You can take out a life insurance policy through your super fund, insurance firm or brokers, financial planner or a bank.

According to the Australian Securities and Investment Commission financial advice website, MoneySmart, super funds should be your first stop.

“Most super funds offer life cover and it is often cheaper than buying it separately through an insurance company – so this should be the first place you look,” it advises.

Different types of cover

Life insurance is generally broken up into four areas – Life Cover in the event of death; Total and Permanent Disability Cover which takes care of the cost of care and living if you become disabled; Trauma Cover that safeguards against major illnesses such as cancer or stroke; and Income Protection to replace money lost through an inability to work due to illness.

All types of life insurance policies require customers to disclose pre-existing medical conditions when prompted and failing to do so can leave people with a worthless policy down the track.

Whichever insurance policy you choose, it’s important to do your homework, access proper advice, and read the fine print.

How much cover do you need?

Michelle Hutchison, of comparison website finder.com.au, says any life insurance policy should provide enough to clear all debts including a mortgage and cover the cost of a funeral as well as maintaining ongoing income and future expenses such as children’s education.

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“An average Australian couple aged 40 with children require life insurance cover of approximately 10-times annual earnings simply to repay debts and maintain current living standards, according to Rice Warner,” Ms Hutchison says.

A stepped or level premium?

Insurance premiums usually increase with age because the older you get the more likely you are to make a claim.

Stepped premiums increase each year as you get older but cost less in the beginning; while level premiums don’t change as you get older, but cost more in the beginning.

Ms Peat says a level premium can take 20-years to break even and restrict the ability to change polices in the future if desired.

Are men and women different?

An investigation by finder.com.au found women are settling for policies worth 15 per cent less than men.

The study analysed more than 22,000 enquiries for different life insurance products over the past two years, with men on average seeking a policy worth $513,130 while women sought cheaper policies at $445,849.

Ms Hutchison said women were looking to cover an average income of $77,762 while men sought higher income protection for a salary of $93,531.

“Women need to value their worth equally as men, regardless of how much they earn. If they don’t, it can hurt their family if something was to happen to them,” she said.

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