You certainly would have heard about it. Maybe you’ve talked about it with a family member. Or read an article or two. But what do you really know about Life Insurance?
Put simply, a life insurance policy helps to lessen the financial impacts on those left behind should the person insured pass away, or be diagnosed with a terminal illness. It does this by paying a lump sum amount (the “cover amount”) to a chosen person (normally referred to as a “nominated beneficiary”).
A policyholder can select a cover amount based on their family needs, for example – how much debt you have, how much money is needed to replace the income of the policyholder etc.
How does Life Insurance work?
A life insurance policy works quite simply. When you take out a policy, you select a cover amount. The insurer then quotes you a monthly or annual premium that you need to pay to be insured for that cover amount. Once you start paying your premiums, your cover kicks in.
If you should pass away or are diagnosed with a terminal illness while the policy is still active (that is, so long as you’re still paying premiums), you or your nominated beneficiary can lodge a claim with the insurer to receive the cover amount as a lump sum.
If your claim is approved, the insurer will make the payment to your nominated beneficiary. The payout is usually tax-free for the nominated beneficiary.
Why do people take out Life Insurance?
Most people take out life insurance to help their family maintain their financial security in the event that the insured person is no longer there to provide for them. In most cases, the insured person is a breadwinner for the family, so losing their ongoing income could leave the family struggling financially with commitments such as:
Car loan repayments
Many people also want their families to maintain their current lifestyle and be able to continue enjoying those experiences that they currently provide for them, such as holidays, sporting and cultural activities. By taking care of the big financial commitments, life insurance can allow a household to spend more of its income on these sorts of activities.
When taking out a policy, most people will usually name family members such as their spouse, partner or children as their nominated beneficiary. This helps ensure that any payout goes directly to those most affected by the passing of the insured person.
When do people normally take out Life Insurance?
There are particular moments in life at which people often consider life insurance. These moments usually give rise to long-term personal and financial commitments, which people want to meet no matter what happens. These include:
Getting married: wanting to provide a secure future for your partner.
Buying a house: making sure that your family can pay off the mortgage and remain in the family home.
Starting a family: making sure that your home is secured, and making sure that your kids can receive the education that you wanted for them.
How is Life Insurance different to other insurance products?
There are a number of other insurance products that also provide cover for illness, injury and death. These include Health Insurance, Funeral Insurance, Accidental Death Insurance, some consumer credit insurance products and Income Protection Insurance. So how does life insurance differ from these products?
Health Insurance: covers medical and surgical expenses incurred by the insured when they undertake a specified medical procedure. It operates on an indemnity basis, which means that it covers the cost of the procedure and usually the insurer pays the amount directly to the healthcare provider. There is also often a gap between the cost of the procedure and the amount covered by the policy. It doesn’t cover any financial losses that you or your family may suffer as a result of your procedure, such as loss of your earning capacity both during the procedure and as you recuperate.
Funeral Insurance: intended to provide fast cash to your family in the event of your death, so that they can pay for your funeral and any other immediate expenses. The cover amount available for funeral insurance is much smaller than for life insurance – usually up to $15,000 – meaning that it would be insufficient to cover major financial commitments like a mortgage or ongoing school fees.
Accidental Death Insurance: as the name states, this product only provide cover in the event that you die in an accident. It does not cover death from any other causes. This product is an alternative for those who don’t meet the eligibility criteria for a life insurance policy.
Consumer credit insurance: these products are usually attached to other products such as a mortgage or car loan, and will generally pay an amount to cover the repayments on those loans if you suffer an illness or injury that prevents you from working. These products are limited in a number of respects. They are generally capped at a time-period of between 12–24 months, and they will cover only the minimum repayment amounts, which means that any other expenses must still be covered from your own funds.
Income Protection Insurance: provides you with a monthly income in the event that you can’t work due to illness or injury. Its aim is to minimise any temporary financial suffering that your family may experience while you can’t work, in contrast to the long-term assistance that life insurance provides. Most importantly, income protection insurance does not cover you for death, which is a key difference between it and life insurance.
Buying Life Insurance
There are a number of ways you can buy life insurance. These include:
Through your superannuation fund: you can use some of your superannuation contributions to buy life insurance cover through your super fund. Life insurance provided by your super fund is often referred to as a “group” product – that is, it provides the same cover at the same price (subject to differences in age) to all members, regardless of their health.
Through a financial adviser: financial advisers can provide personal advice on life insurance, and can offer products with cover amounts in excess of $1 million.
Through a direct insurance company: a lot of insurance companies offer life insurance online or over the phone. These products usually offer up to $1 million in cover, and require no medical examinations or paperwork.
Before you buy a policy, it’s worth figuring out how much cover you need. Real Insurance has a life insurance calculator that can help you with this. Once you know the cover amount you’re after, you can start shopping around to see which products best suit your needs.