We understand that it’s not the cheeriest topic, but life insurance is a key part of having a good financial plan. It means that if you or your partner die or become seriously ill, you might be able to help your family financially. We’ll look at the reasons why life insurance is a good idea and the different types of cover available.
Give me the main points
- The most important reason to consider taking out life insurance is to protect your family if you die or become unable to work.
- There’s a good case for anyone with dependants or people who plan to have dependants to take out life insurance.
- Life insurance policies can be bought through life insurance companies, financial advisers/brokers, or through superannuation funds.
- The amount you roughly need is the gap between what your dependants require, and the value of your assets (not including your family home).
- Whatever you choose, it’s important to reassess your life insurance cover against your needs as life changes.
Reasons to get life insurance
To protect your family and loved ones
If your loved ones depend on your financial support, then you should consider life insurance. It’s especially important if you have young children, or a partner or adult children who couldn’t maintain their standard of living without your income.
To leave an inheritance
Even if you don’t have any other assets, you can create an inheritance for your dependants, by buying a life insurance policy. You simply name them as beneficiaries in the policy.
To pay off debts and other expenses
It’s not just about providing income to your family to cover their everyday expenses. Life insurance policies will cover outstanding debts like: mortgages, car loans, personal loans and credit card debt. You don’t want your dependants to be left with extra financial burdens. It could also cover the cost of your funeral, if you haven’t taken out funeral cover.
To bring you peace of mind
No amount of money can ever replace a person. But life insurance could provide you and your family with the peace of mind that if the unthinkable does happen, they’ll be taken care of financially.
Different types of life insurance
Different types of cover fall under the broad heading of life insurance. Which one you’ll need depends on your situation.
- Life cover – also known as term life insurance or death cover pays a set amount of money when you die. The money is paid to the people you name as beneficiaries in your policy.
- Total and permanent disability (TPD) cover – pays a lump sum to assist with your rehabilitation and living costs if you become totally and permanently disabled. TPD is often bundled together with life cover.
- Income protection –covers your lost income if you become unable to work because of injury or illness.
When to take out life insurance
You should think about life insurance when you get married, or have children/dependants who rely on you financially. Even if you don’t yet have dependants, you should consider taking out life insurance. That’s because insurance companies usually make you get a health and medical check before quoting your premium. It’s best to get those tests done when you’re younger and more likely to be in good health.
How much life insurance do you need?
The amount of life insurance you’ll need varies as your circumstances change. Let’s say you’re a 22-year-old with no dependants, you might only want enough insurance to cover the costs of a funeral.
But once you get married, have children and take on a mortgage; you’ll probably need more cover to provide for them. As you get older again, and your superannuation builds up, your children become independent and you’ve paid off your mortgage, you may need less cover or maybe even none at all.
To help work out the level of insurance cover you should consider:
- How much cash your family would have if you were to die or become disabled. You should include your super, shares, savings and existing insurance policies.
- How much cash your family would need if the worst were to happen. Consider the size of your mortgage and any other debts, as well as childcare, education and other costs.
The difference between these is the amount of cover you should ideally get.
Other things to consider
Funerals can be expensive. According to Australian Securities Investment Corporation (ASIC) funerals can range from $4000 for a basic cremation to around $14 000 for a more elaborate casket and burial.
If you have life insurance, this can be used to cover your funeral expenses, but if you don’t you may want to consider some other options. There are a few different ways you can pay for a funeral including:
- Pre-paid funerals
- Funeral bonds
- Funeral Insurance
- Term deposit or savings account (this account would form part of your estate when you die, so make sure you tell your beneficiaries).
ASIC’s Moneysmart has some helpful information about ways to pay for your funeral.
Have a read of our article on estate planning to get a broader understanding about how you can plan for the future. You can also visit the Financial Planning Services for information and estate distribution services.