Simply speaking, Life Insurance is essentially a formal contract between you and an insurance company. In exchange for your routine premium payments, the insurance company will pay a lump sum known as a death benefit to your beneficiaries after your passing or diagnosis with a terminal illness. Your beneficiaries can put the money towards any purpose they choose. So, in essence, purchasing a life insurance policy provides peace of mind that your loved ones will be financially looked after in the event of your death or terminal illness diagnosis.
When to apply for Life Insurance?
There are a number of key events which commonly trigger the need to arrange a life insurance policy which include:
- Buying a property and taking on a mortgage
- Getting married or entering a de facto relationship
- Having children
If you have dependents who rely on your income to fully or partially pay for the household expenses such as the mortgage, childcare or school fees, utilities and other lifestyle expenses, life insurance can act to ease the financial burden in the event that you pass, particularly if your passing is unexpected.
What is the right amount of cover?
When taking out a life insurance policy, you can usually select the amount of cover you require. When making this decision you should ask yourself “How much money will my family need to maintain their current lifestyle and not be financially disadvantaged if I were to die or be diagnosed with a terminal illness”?
Important expenses to note and include in your calculations include the mortgage, other debts, income and general lifestyle and household expenses. Unfortunately, there is no one-size-fits-all solution. If you take out a policy with too little cover your loved ones may not be adequately protected. Conversely, taking out a policy with too much cover means larger monthly premiums so you will be parting with more money than you need to.
Life insurance premiums
In order to secure the financial protection afforded by life insurance premiums, you generally need to pay either a monthly or annual premium to your insurer. Insurers also need to perform a number of calculations when tallying the total cost of the Life insurance premiums. Premiums are computed by taking the following points into consideration:
- Occupation, and
- Lifestyle factors such as smoking, drinking or recreational drug taking.
The product disclosure statement
In addition to considering the cost of the premiums, it’s important you take the time to carefully read the relevant product disclosure statement also known as a PDS. Points to look out for include the duration of the policy, built-in benefits as well as what is not covered (also known as exclusions). Some of the built-in benefits can include:
- Terminal illness benefit
- Funeral advancement benefits
- Future insurability benefit
- Premium freeze option, and
Also, it’s important you take the time to carefully examine the exclusions. For example, most insurers won’t pay out your policy if your death was the result of suicide in the first 13 months from taking out the policy.
To wrap up, lifetime milestones are a great time to consider taking out a life insurance policy. With so many insurers in the market, take the necessary time to ensure you have chosen the best policy for both you and your loved ones. These milestones are also an excellent time to consider writing or updating your written Will, if you haven't already done so.
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.