What life insurance is most important?
Insurance is probably one of the more frustrating things that you have to purchase. You pay money for something that you hope you never have to use. But if you need to make a claim, it could be the one thing that keeps your world together. There is a fine line between the cost you pay and the benefit you get, so making your money go as far as possible is important. Here we share what life insurance is most important so you can protect your family, and your wallet.
Life insurance provides your dependents with a lump-sum payment on your death. It may also pay out with a terminal illness diagnosis leading to death within 12 months.
The amount of the payment depends on the level of cover you choose to insure for. Calculate a level of cover that allows your debts to be repaid and family expenses maintained if you were to pass away. Make sure you take into account any anticipated education expenses for your children.
Total Permanent Disability insurance
Another important life insurance product is total and permanent disability or TPD insurance. Total permanent disability insurance provides a lump sum payment to you become totally or permanently disabled. You may not be capable of earning an income, yet you’re still alive and have expenses to cover.
There are two types of total permanent disability insurance. ‘Any occupation’ covers you if you can’t work in any occupation at all (total disablement). ‘Own occupation’ covers you if you can’t work in an occupation based on experience and education.
The level of cover required is similar to life insurance.
Trauma or critical illness insurance provides a lump-sum payment if you suffer a serious illness, such as cancer, heart attack or stroke. It was conceived by doctors after seeing the effects of trauma or critical illnesses on patients’ financial wellbeing. It’s helpful for going towards the cost of medical treatment and reducing financial stress at an already stressful time.
The level of cover for trauma is usually a lot lower than total permanent disability since you’re more likely to return to earning an income.
Each policy has a list of pre-defined medical conditions that it covers. Make sure you read your policy document so that you understand what you’re purchasing.
Income protection insurance
Income protection provides you up to 75% of your current monthly income to help maintain your day to day living if you are unable to work due to illness.
The benefits commence after a waiting period and are paid monthly for a pre-determined benefit period. You select what period of time you need to be off work before you get paid and how long you would like to be paid – from two years up until the age of 65. The longer the waiting period and shorter the benefit period, the cheaper it gets.
Income protection premiums are typically tax-deductible.
If you’re self-employed, you my also like to consider business expense insurance. This provides your business with revenue if you can’t work. It could be vital to your business if you need to hire someone to do your job while you can’t.
We share more about how to protect your income when you’re self-employed here.
Can I self insure?
If you choose not to take out life insurance, your other option is to self-insure. This is simply putting sufficient funds away to cover your expenses are unable to work or pass away.
As you’re building wealth, you typically don’t have the financial backing to take care of major events that stop you from working. This is where insurance comes in. But if you have sizable assets already, self-insurance may be an option.
If you’re younger or haven’t built up sufficient assets to protect you in difficult times, you’ll need to save a significant percentage of your earnings on a regular basis to give you a buffer.
What if I don’t take out insurance?
If something happens to you and you don’t have insurance or funds set aside, you may be forced to take drastic action to keep things going. This might include changing where you live or finding other ways to dramatically cut your costs. If you’re a business owner, it could also mean the end of your business.
We understand that life insurance is a significant expense and it may feel like you’re paying for nothing. But sickness, disability and death are traumatic enough without stressing about how you will pay the mortgage. We’ve had clients who have become ill tell us how grateful they are to focus on their recovery without worrying about money. Other clients who have sadly lost a partner have said their grief was so overwhelming that they wouldn’t have coped with financial stress loaded on top. Outsource the risk to someone else and you’ll sleep better at night knowing you and your family are protected.
There are things you can do to get maximum value from your life insurance policies. Examples include paying for your premiums within super and claiming deductible insurances in your tax return. We share some ideas on how to get the most from your insurance cover here.