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Life Insurance – Getting Started
What is Life Insurance?
Quite simply, life insurance is protection against financial hardship in the event of your death. Most of us don’t often stop to consider the possibility of our own death but the reality is that death does happen, and it’s much easier on your loved ones if there is a plan in place. For starters – death can be expensive! There are the related costs of funeral ceremonies and burials or cremations, but also the cost of pending bills, loan repayments, mortgages, school fees, etc.
A Life Insurance policy will provide a lump sum payment in this event allowing the policy holder to sustain financial stability for their nominated beneficiaries.
Why do I need life insurance?
Life insurance is often overlooked as being a non-essential or luxury insurance product, whilst we pump money in to other insurance products such as car and home insurance. According to the Lifebroker Life Insurance Research Report 2010, 86% of Australians purchase car and home contents/building insurance, whilst fewer than 50% have life insurance. Make no mistake - your life is your most important asset.
For many people the decision to purchase life insurance comes with having a family. Life insurance provides a security blanket to assist with living expenses, mortgages, car payments, and all those other costs that your family will be responsible for should you pass away. It can help provide for your children’s education, or repay any outstanding loans or debt. It is particularly crucial for anyone who owns a small business in order to keep the business operational or cover the closure expenses in the event of your passing.
How to choose a life insurance policy.
There are a few considerations when choosing your life insurance policy:
- Check for existing life insurance: Often super funds will include a basic life insurance component.
- Determine who should be covered: Don’t just focus on the high income earner in the family.
- Calculate life insurance amount: Purchasing too little life insurance could leave your dependents short changed, whilst purchasing too much will cost you more in premium payments.
- Evaluate the policy costs: Each policy is different with different fees and costs.
- Check the covers/exclusions: Ensure that the policy you are purchasing is suited to your personal situation.
How much life insurance cover do I need?
There are numerous methods of calculating the amount of life insurance cover you require. A simple online search will bring up a host of online life insurance calculators that will produce a wide range of different predictions on the required amount. In reality, the amount of life insurance you require will depend on your personal situation. It’s best to consider your financial situation and that of your family and determine how much money would be required to ensure financial security in the event of your passing.
Life Insurance with Medical Conditions
It pays to be honest and up-front with your life insurer. You should disclose all previous medical conditions even if it’s from years ago, this doesn’t necessarily mean won’t get cover or that your cover won’t include pre-existing condition. What it does mean is that you won’t run the risk of invalidating your policy due to a medical issue that you should have disclosed. It has been estimated than one in ten life insurance policies do not pay out due to ‘withheld medical information.’
What are the different types of life insurance?
Term Life Insurance:
This type of Life Insurance provides the policyholder with cover against death, or terminal illness, for a fixed term. A Term Life Insurance does not build any cash value and so does not pay any benefit to those who live beyond the term insured. Most Term Life Insurance policies can be renewed up to the age of 99. The policyholder is required to nominate beneficiaries in the event of a lump sum payment being made. Select Term Life Insurance policies are usually taken out for shorter periods of time, for example 5 or 10 years during which time this cover is provided. The advantage to Term Life Insurance is that it can provide a window of insured time to allow you to pay off a mortgage or for your children to leave home. The down side to is that it may be difficult and more expensive to renew as you get older and that it will only pay out if you should die within the term covered.
Total Permanent Disability (TPD) Insurance
This insurance will provide a lump sum payout should you be permanently unable to return to work due to serious illness or injury. Different insurance companies may have different definitions of Total and Permanent Disability so you should always clarify their definitions at the outset. There are two key types of TPD insurance:
- Own Occupation: where you are unable to return to work in the specific occupation for which you are experienced and qualified.
- Any Occupation: where you are unable to return to work in any occupation for which you are reasonably qualified.
Trauma Insurance
A Trauma Insurance policy will provide you with cover against a wide range of covered conditions such as heart attack, cancer, multiple sclerosis or Parkinson’s disease. Trauma Insurance can be purchased as part of a Term Life Insurance policy or as a standalone policy. Should you contract one of the covered conditions you will receive a lump sum payment upon diagnosis to allow you to use the funds to cover medical treatment costs, reduce your existing debt or make the necessary changes to your lifestyle. Not all Trauma policies include Death benefit so be sure to check out the small print and possibly consider Trauma cover as part of a Term Life Insurance policy.
Life Insurance: Stepped Payments vs Level Payments
There are two main life insurance premium payment types:
- Stepped Payments: The premium amount is calculated based on your age. This means the insurance premium is lower when you are younger, and gradually increases as you get older. Stepped premiums are useful for short term cash flow but can end up costing more over the long run.
- Level Payments: This premium is calculated using an average payment across the life of your insurance policy. A level premium may seem more expensive initially but will not increase over time, which often brings a long term saving.
Disclaimer:
The information provided on this website is general in nature and for use in Australia and does not take into account your particular financial situation or insurance needs. We recommend that you speak to a financial adviser before you make any decision regarding life insurance, income protection insurance and trauma insurance.
Information & advice in this section is provided by xLife Pty Ltd, a Corporate Authorised Representative of Millenium 3 Financial Services AFSL No. 244252. Any quotations provided on this site are estimates only based on the information that you provide. WhistleOut may get a referral fee if you enquire with an insurance adviser but does not receive a commission from insurers and does not provide personal advice. Refer to a PDS before acquiring a product.