Life insurance – the basics and things to consider

Life insurance a crucial aspect of financial planning that can provide security and peace of mind for you and your loved ones. Life insurance serves as a safety net, ensuring that your family and dependents are financially protected in the event of your passing.

Let’s delve deeper into the basics of life insurance and the important factors to consider when selecting a policy that fits your needs.

The main points

• The most important reason to consider taking out life insurance is to protect your family if you pass away or become unable to work.
• There is 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 need is the gap between what your dependants require, and the value of your assets (not including your family home).
• Whatever you choose, it is 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 is especially important if you have young children, a partner or adult children who could not maintain their standard of living without your income.

To leave an inheritance

Even if you do not have any other assets, you can create an inheritance for your dependants through buying a life insurance policy. You simply name them as beneficiaries in the policy.

To pay off debts and other expenses

It is 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 do not want your dependants to be left with extra financial burdens. It could also cover the cost of your funeral if you have not taken out funeral cover.

To bring 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 happens, they will be taken care of financially.

Different types of life insurance

Several types of cover fall under the broad heading of life insurance. Which one you will 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 or dependants who rely on you financially. Even if you do not yet have dependants, you should consider taking out life insurance. That is because insurance companies usually make you get a health and medical check before quoting your premium. It is best to get those tests done when you are younger and more likely to be in good health.

How much life insurance do you need?

The amount of life insurance you will need varies as your circumstances change. Let’s say you are 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 will probably need more cover to provide for them. As you get older your superannuation builds up, your children become independent and you have paid off your mortgage, you may need less cover. You may not need any at all.

To help work out the level of insurance cover you should consider the following.

• 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.
• Talk to a financial adviser that will work to understand your situation and guide you towards a suitable option for your needs. Contact our wealth team. 

Other considerations

Funerals can be expensive. According to Australian Securities Investment Corporation (ASIC), funerals costs can range vastly. This can start 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 pass away, so make sure you tell your beneficiaries).

Alteris Insurance

We have recently partnered with MBS Insurance (MBS) to form a joint venture called ‘Alteris Insurance.’ MBS has been providing personal and business insurance advice, ongoing insurance management, and complete claims management for more than 15 years, providing a solution that complements the Alteris professional offering. If your circumstances have recently changed, or you have yet to take out life insurance, please speak with one of our advisers who will provide guidance and put you in touch with an Alteris Insurance specialist to help you make informed decisions about your coverage.