Life Insurance is one of the soundest financial investments you can make. If you leave dependants behind, your policy will ensure they are financially secure and able to meet ongoing expenses.
Everyone is ultimately vulnerable to health complications and accidents, so it’s hard to understand why anyone with available finances would remain uninsured. It’s true that nobody wants to contemplate death for themselves or their loved ones, and when things are going along nicely, life insurance is easily forgotten. However, there’s no denying that life insurance cover could prove invaluable in a time of need.
There are several types of life insurance available, and here are a few ideas that will assist in deciding which policy is right for you.
This is a common life insurance policy that pays out if the policyholder dies during the specified term of the policy. You can choose how long you wish to be insured, with policies generally set for a period between 10 to 25 years. The agreed payment, or ‘sum assured’ is agreed upon when you take out the policy, but remember to read the fine print as some policies don’t pay out if you die soon after taking out cover. If the set policy time-frame expires before you die, there is no pay out. There are several term insurance variations:
- Level term insurance: The ‘sum assured’ amount of cover remains the same for the duration of the policy.
- Decreasing term insurance: Your pay-out will reduce over time, usually in keeping with reduced mortgage repayments or other debts.
- Increasing term insurance: Your pay-out increases over time to keep pace with the cost of living, and is usually pegged at 5%, or in line with inflation.
- Guaranteed premiums: Your payments will remain the same over time, assisting you with budgeting.
- Reviewable premiums: This can be less expensive initially, but is subject to review, with the potential for payment increases over time.
How long should I remain covered?
Various factors need to be taken into consideration, such as mortgage repayments, outstanding loans and credit cards debts. As a mortgage is often the biggest investment you make, it’s common for life insurance cover to remain for the duration of your mortgage. It’s also very helpful to loved ones if your cover remains in place after your mortgage is paid off. This will leave them with a lump sum to assist with maintaining their standard of living.
Another consideration is the age of your dependants. If you have a young family you may prefer cover that remains in place until they are financially independent and able to support themselves.
How much cover should I get?
Firstly, add up debts that will need repaying if you are no longer around, plus an ongoing sum that will assist your family moving forward. You should also ascertain if you are presently covered at work. Many employers provide insurance that pays out a lump sum if you die. Don’t be reluctant to investigate exactly how much cover you have as a ‘death in service’ benefit. Remember that not all employers provide cover, whereas your personal policy will offer continuous protection. Also, as we age, death becomes more imminent, and as a consequence life insurance cover gets more expensive. Taking out a premium at a younger age will guarantee less expensive monthly insurance payments.
What factors influence the cost of life insurance?
The good news is that life insurance premiums are currently much lower than they were previously. Factors that influence the cost of your insurance cover include:
- Your age
- Health considerations
- Smoking status
If you stop smoking after taking out cover, let your insurance company know, as they may reduce your monthly premiums. Honesty is important, and if you provide false or misleading information regarding your health or smoking status your policy will be invalidated and you won’t get a pay out.
Are there other choices of cover apart from term insurance?
Variations on the life insurance theme provide further options. These include:
Family Income Benefit
Instead of being paid a lump sum, your family will be provided a regular monthly tax-free income for the remaining duration of the policy term after you die. The downside is that if the policy expires shortly after you die, your family will only get monthly payments for a short period of time.
Whole of life cover
This kind of policy provides a guaranteed pay out, and as a consequence premiums are much higher than for term insurance. You will also be paying premiums until you die, even if you have already cleared your mortgage and are in a good financial position.
Over 50s life insurance
This policy option is popular with those who have been a little slow getting around to life insurance cover. An attraction is that you will be accepted even if you have a medical or illness history. However, these policies commonly have a maximum age limit, and will need to be in place for a period of time for a claim to be considered. Premiums can be inexpensive, but cover is also relatively low, and will only assist with immediate expenses, such as funeral costs.
The life insurance cover you select can be tailored to suit your individual needs. The options in this article provide only a brief overview. For further information about choosing a policy that is right for you, talk to your insurance provider, or check ASIC’s Moneysmart life insurance page.