The life insurance industry has had a big shakeup in recent years, and it’s almost unrecognisable from the sleepy and “one product size fits all” approach of a decade ago.
People are sourcing their insurance online in increasing numbers, and traditional brokers are struggling for market share just as they have moved to a fee for service model, which has pushed up prices.
Even airlines are getting into the life insurance business. Qantas has recently inked a deal where people who buy life insurance through a Qantas partner – TAL Life – earn frequent flyer points.
At the core of the issue is that the term “life insurance” doesn’t only mean insurance paid out in the event of the insured person’s death.
The term covers several different types of insurance which have different relevance to different people at different stages of their lives.
Advisers regularly tell people they should check their insurances regularly, so they have appropriate levels of cover for the correct type of insurance.
To clarify the market, Life Insurance is a blanket term referring to:
- Total and Permanent Disability (TPD) Cover – refers to a lump sum payment if the policyholder suffers a disability.
- Trauma Cover. – Lump-sum payments or illness cover if the policyholder suffers a disability or a terminal or debilitating illness.
- Income Protection – delivers benefits of 75 per cent of the policy holder’s income if they cannot work because of illness or injury.
- Life Insurance. The traditional product pays a lump sum to nominated beneficiaries in the event of death or diagnosed with a terminal illness.
- Funeral Insurance. It is what it sounds like. It’s pre-paying for your funeral, so your family doesn’t have to pay for it.
Which one is best for you depends on your stage of life.
Younger people without dependents are less likely to need life insurance or trauma cover and find income protection insurance more relevant.
Income protection insurance will be less critical to retirees, but they will be more focused on the life cover, trauma insurance and even funeral cover.
Here’s a quick guide to life insurance needs through different life stages:
| Age Range | Characteristics | • Insurance Priorities |
|---|---|---|
| 18 - 25 | • Starting work • No dependents • No mortgage | • Income Protection |
| 25 - 35 | • Children are born • Mortgages are taken out • Income increases | • Life Insurance • Income Protection • Trauma Cover |
| 35 - 45 | • Income increasing • Mortgage decreasing • Saving for retirement | • Life Insurance • Income Protection • Trauma Cover (greater need) |
| 45 - 55 | • Trajectory towards retirement • Children are older, becoming independent • Long term debt level decreasing | • Life Insurance, Income Protection and Trauma Cover are less important • TPD can be more relevant |
| 55 - 65 | • Wealth has been accumulated • Children are independent • Retirement is close | • TPD Cover could now be as important as Life Insurance, Income Protection and Trauma Cover. • Many people also take out funeral cover at this life stage. |
Life Insurance Death Benefit
Life insurance death benefit, also known as death cover, is the money paid to your beneficiaries if you pass away while the policy is still in force, giving you peace of mind.
You can structure how the policy will pay the death benefits.
For instance, you may specify that your beneficiary will receive 50% of the death benefit after you pass away and the remaining to be disbursed after one year.
Some insurance companies in Australia also provide different payment options instead of a one-time payment.
For example, you may choose to use the death cover to open up a retirement or investment account or even choose to have the death benefit paid in instalments as a form of financial support.
In retirement accounts, the death benefits are often treated differently and are often subject to taxation.
How Much Death Benefit Do You need
An essential part of buying a life insurance policy is estimating how much money your family will need once you pass away.
Setting the death benefit depends on numerous factors. So, the minimum amount of face value you need will be different from your friend.
Financial advisors usually recommend buying ten times your yearly income, even though your estimated cover could be lower or higher.
Below are some of the most important factors to consider in choosing death benefit or insurance face value:
Income Replacement
The primary purpose of life insurance is to replace lost income due to sudden death.
If you are the family’s breadwinner and earn $80,000 per year, you need a policy that will pay $800,000 that your beneficiaries can use as living expenses for the next ten years.
Another method of computing the cover amount you need is to multiply your yearly income by the number of years remaining until you plan to retire.
For example, if you are now 40 years old and make $20,000 p.a., you need at least $500,000 coverage, assuming you want to retire after 25 years.
This method is based on the standard of living and depends on your dependents’ money should you pass away.
The basis here is that your beneficiaries can take a 5% withdrawal from the coverage per year.
For more accurate computation, you may use an online insurance calculator.
Debt
You can also use life insurance to pay off personal loans, credit card balances, mortgages, car loans, etc.
If you have debts and you pass away, your family can use the proceeds of your life insurance to settle your debts.
So if you have a $400,000 mortgage and a $10,000 auto loan, you need at least $500,000 to $600,000 to cover your debts.
Choose a death cover that is a bit higher than your loan balance for interest, fees, or inflation.
Dependents
As a rule of thumb, you should buy a policy that will take care of people who will suffer financially if you are gone.
For example, the death of a child (while absolutely devastating) does not usually constitute a financial loss.
Meanwhile, if you are earning income and your spouse depends on you, the loss is not only devastating but can result in financial struggle.
However, a life insurance policy may also include your business partners or co-guarantors as your dependent as long as your death will cause them financial loss.
Life Insurance and Your Superannuation
If you’re not yet aware, your superannuation fund might be bundled up with life insurance.
Most super in Australia have established partnerships with life insurance companies. Hence, they have special purchase agreements that allow you to access competitive plans that are generally not available if you buy insurance through an independent broker.
The downside here is that the cover may not be enough for your needs, and some policies within a super have limited features that can be difficult to amend.
Review your current fund and check how much death cover you have. If you think the cover is not enough, you may need to shop around to fill in the gap.
Final Check Before You Sign Up for a Life Insurance Plan
Before you purchase a life insurance policy, your insurance provider is legally obliged to present to you a product disclosure statement (PDS). In this important document, you can check the following:
- Coverage inclusions and exclusions
- Particular information that you need to provide to your insurer
- Premium rates – are they increasing each year?
- Years you need to wait before you can file a claim
- Process for filing a complaint about decisions or life insurance claims
Term insurance that you can renew over a certain period (every five years or every ten years) is often enough for most people.
But you have to consider your circumstances. If you are buying insurance through an agent, you must look at what you need to avoid purchasing a plan that is not sufficient or extra riders that you don’t need.
The right policy can help your family survive after any unfortunate event, so make sure that you understand how life insurance works.