It’s no secret that what happens after death can be confronting, because let’s face it – coming to terms with our own mortality? It’s not easy. But talking about life insurance is definitely an important conversation that’s worth having early on.
What is life insurance?
Life insurance gives your dependents the ability to start rebuilding should life take an unexpected turn. Put simply, life insurance is a commitment from a life insurance company to provide a payout in the event you prematurely die or are diagnosed with a terminal illness. Payouts can be directed to specific people (eg your spouse and/or children) or directed to your own estate (which then makes having a valid and updated will all the more important).
What should I consider when choosing a Life Insurance policy?
What does life insurance cover?
Strictly speaking, life insurance covers a person’s death or terminal illness. There are also 3 other types of cover that are categorised as ‘life insurance’ but actually relate to sickness and disability (rather than death). These are:
Total and permanent disability (TPD) insurance
This pays a lump sum to help with rehabilitation and living costs in the event that you can’t work again for health reasons.
This covers you if you’re diagnosed with a major illness like cancer, heart disease, stroke, and/or other life-threatening conditions. Also known as ‘critical illness cover’, trauma insurance pays a lump sum which is typically used to pay for your recovery or help you reduce your debts at this difficult time.
This pays a proportion of your income (typically 75%) if you’re unable to work due to illness or injury. Without this cover, many people struggle to meet everyday living expenses including rent or mortgage payments. Policies will generally have both a waiting period (the days of disability before a claim can be made - eg 90 days) and a benefit period (how long a payout will continue while disabled - eg 2 years).
Who needs life insurance?
If you have a partner or dependants, start by thinking about the financial difficulty that would face without any additional money coming their way at that time. You can think about it in terms of the money you will no longer be earning and also in terms of what they will need to sustain the lifestyle you would want for them.
If you are single and don’t have people who depend on you financially, you may not need life cover, but you might want to consider getting other types of insurance like trauma insurance, income protection insurance or total and permanent disability (TPD) insurance in case of illness or injury, so you’re covered just in case the unthinkable happens.
There are also a number of key events which usually trigger the need to arrange a life insurance policy. This can include buying a property, taking on a mortgage, getting married, entering a de facto partnership or having children. You could also take this time to consider writing or updating your written Will, too.
What to check before you buy life insurance
In Australia, a life insurer must give you a product disclosure statement, also known as a PDS. Once you have this, go over the PDS with a fine tooth comb and check it for:
- What exactly is covered and what is excluded under the policy
- What information you will need to give an insurer
- Information on premiums and how they change over time
- Waiting periods before you make a claim
- How to make a claim
- How to make a complaint about the claims process or decision
You should also double check whether you already have life insurance through your superannuation fund, so you don’t pay for life insurance twice.
A note on pre-existing medical conditions
Although most insurers will cover applicants for pre-existing conditions, high risk activities or jobs, some insurers may list these circumstances as specific exclusions on their policies. Make sure you read the fine print outlined in your PDS so you’re aware of your chosen cover’s exclusions and restrictions.
If you have a pre-existing medical condition (like asthma, depression or a heart condition, for example), make sure you disclose any information about your medical circumstances to your insurer. It’s important to be honest when disclosing your pre-existing conditions with your prospective insurer, as failure to do so may jeopardise any future claim on your policy.
As difficult as the conversation can be, life insurance acts as financial security for you and your family should the unexpected occur, so it’s worth talking about it sooner rather than, well, when it’s too late.
To sum it all up:
- It may be worth taking out a life insurance policy, even if you’re single or you don’t have dependents.
- Ensure you check and double check the fine print in your insurer’s PDS.
- Double check whether you already have life insurance through your superannuation fund (and what level of cover you have through this, as it might not suit your particular set of circumstances).
- Go through our checklist above before signing on the dotted line.
- Disclose any pre-existing medical conditions to your respective insurer.
Lastly, with so many insurers in the market, take the time to ensure you have chosen the best policy for you and your family. This might also be a good time for you to consider writing or updating your written Will, if you haven't done so already.
Disclaimer: The content of this blog is intended to provide a general guide to the subject matter. This blog should not be relied upon as legal, financial, accounting or tax advice.