Being financially protected can be one of the most important things you can do for you and your family.
A lot of people go to great lengths to protect the things that are valuable to them, such as their home, car, and family heirlooms, but can neglect to take care of themselves.
Depending on the circumstances, life insurance can offer financial protection for you and/or your family in the times when you might most need it.
If it's something you're considering, here are some things worth thinking about.
Why is cover needed?
Life insurance can help reduce or remove the financial impacts you might face if things go wrong in your life.
It can help provide you and your family with financial security and relief in the instance of illness, injury or death.
Sadly, on average, Australians are underinsured. In fact, the 2017 Underinsurance Australia report found that the median level of life insurance cover would only cover 28 per cent of the amount needed to ensure family and dependants are able to maintain their family’s standard of living after the death of a parent or partner.
Actuaries at Rice Warner calculated that, in general, Australians are underinsured by approximately $1,811 billion in 2018.
Who should take up life insurance cover — and why?
Understanding whether you need life insurance (and what type) is dependent on your personal circumstances.
If you are the main financial provider for your family (such as a partner and/or dependants), you might want to consider whether you and your family are appropriately covered if you become ill or injured and can no longer work, or if you die or become terminally ill. Depending on what kind of cover you have, life insurance may help with maintaining your family’s current standard of living, including essential payments such as utilities, mortgage/rent, and debts.
Types of life insurance available
There are a few types of cover available. Some you can take up as part of your super and others are only available outside of super. While there are only a few different types of life insurance, every insurer has different definitions of what is and isn’t covered in the policies they offer. So, before deciding to take out any cover, it’s important to read the product disclosure statement (PDS) to understand what you would be covered for.
Life insurance
Sometimes called ‘death cover’ or ‘life cover’, this type of insurance can pay a lump-sum payment to your beneficiaries if you die or become terminally ill.
Total and permanent disability
TPD cover can pay a lump-sum if you become totally and permanently disabled. This cover is designed to help cover the cost of ongoing medical expenses, lost income or changes to your home to make it more liveable.
Income protection
Income protection is designed to help replace part or all of your income if you are unable to work for a period of time due to injury or illness.
Depending on your cover and other circumstances, you could be paid at least a proportion of your income, usually around 75 per cent of your pre-illness/injury gross salary for a specific period of time. It is usually paid in regular periods, just like a salary.
Are you already covered?
If you have superannuation, you may already have some type of cover (generally death and TPD) if you obtained default life insurance cover when you opened your account.
However, the Federal Government’s Protecting Your Super Package which came into effect on 1 July 2019, introduced a number of changes including that life insurance cover in super for inactive members must be cancelled. What this means is that if no contributions (such as contributions made by your employer or contributions you make) have been made to your super account in 16 months, you could lose your life insurance cover. So, before relying on life insurance in your super, make sure you know that you’re covered and what you’re covered for.
How can you take up life insurance?
You can choose to take up life insurance inside your super or as a stand-alone policy. While it's a personal decision, there are a number of things you should consider.
Here's what to consider if taking life insurance cover inside super.
The perks
You don't have to worry about making the payments: For any life insurance cover held in your super, regular insurance premiums are paid direct from your super account. Because you don't pay the premiums outright, it's one less direct debit to think about.
Cover is often cheaper: Because super funds pool insurance into a group policy for members, if held in super, life insurance cover is usually cheaper for members (all other things being equal).
The considerations
Premiums can eat into your super: Since insurance premiums are paid from your super, it can erode your super balance. So, you need to ensure you have enough in your account to fund any life insurance you want to maintain.
The level of cover may not be adequate for your needs: Many super funds offer standard life insurance with a default cover amount. The cover amount is not specific to your needs, so it may not be sufficient to cover your individual circumstances. However, if you review your life cover regularly, you can assess and change the level and type of cover as required. And most super funds offer tools to help identify the level and type of cover suited to protect you and your family.
Not all life cover is available: Not all types of cover are available through your super fund. Some types of cover, such as trauma or homemaker’s insurance, are only available as standalone policies outside of super.
Waiting periods: Because life insurance cover through super is pooled, waiting periods are different to those that would have applied if you held the insurance policy outside of super. You usually have to wait longer to start claiming on any eligible payouts through super than a standalone policy.
Conditions of release: You need to meet a condition of release to access insurance benefits where insurance is held through super.
Before making a decision about whether life insurance is appropriate for you, consider speaking to a financial adviser who can provide you with advice based on your personal circumstances.
