Life insurance is a topic that most people don’t like to think about, but it’s something that they need to have. Particularly evident among younger generations is the belief that the worst will never happen to them, so they don’t need to worry about providing for their loved ones in the event of sudden death. They have time – why worry about it until they are older?
Life insurance can be expensive depending on what level of cover you need, so it’s common for people to think it’s an unnecessary expense while they are younger. As new additions to the family arrive, and expenses such as mortgages mount up, these people need to think beyond their own needs and consider how everyone else would fare in their absence. While it can be a tough pill to swallow, life insurance is a gift with which you can leave your loved ones so they don’t need to worry about how they will afford to live without you.
Because life insurance isn’t something that is regularly discussed, it’s common not to know where to start, or what you need. Not everyone has the same requirements when it comes to life insurance, so we have outlined some simple steps to help you figure out what level of life insurance in Australia you need.
Step one is to figure out what you need life insurance for.
Sounds simple enough, but life insurance can be purchased with a specific purpose in mind.
Most people use life insurance as a way of providing their family with money if they are no longer around. The money can be used to cover bills, expenses, or anything the family deems necessary. However, it could also be used in other ways. For example, some families may want to pay off the mortgage, so the cover they need might only extend to whatever is left to pay off on the house. If the property is paid off already, others get life insurance to help cover funeral costs when they die so they don’t introduce expenses their loved ones will have to pay.
You should think about what you need life insurance for and how much money your family will need. If your spouse is employed and you have grown up children, you don’t need to worry as much about being a sole financial provider to everyone as they have their own finances to support them. This keeps costs down.
If your family is young, or you are the sole breadwinner, aim for a higher payout. It costs more, but your family depends entirely on you. Your absence would be devastating enough on its own without the stress of knowing their income will similarly end.
Step two is to understand the difference between term life insurance and permanent life insurance.
Term life insurance provides coverage for a set amount of time, while permanent life insurance lasts until someone dies.
Term insurance is better for flexibility and is cheaper than permanent insurance, so it’s a great way of getting life insurance at a lower cost. However, after the term insurance ends, the cost of the next term life insurance policy will normally go up. If you take out long terms of life insurance, this may not be a problem, but if you only insure for a year at a time, the costs mount up over the duration of your life. It’s also a good alternative to cover temporary expenses. For example, if you have a 30-year mortgage, you may want to take out a 30-year policy to ensure the mortgage gets paid off with or without you.
Keep in mind that if you outlive your term policy, you won’t receive any benefit if you pass after your insurance term ends. Despite this, it still tends to be a more suitable choice for most people, as a large percentage of the population simply don’t need permanent protection. Ultimately, if you are young, single, or healthy it’s likely that term life insurance is the right choice.
Permanent life insurance will be more expensive, but it’s better for people who are older or have health problems. Whether your death happens immediately after taking a policy, or years down the line, your beneficiaries will receive a payout.
An added benefit to permanent life insurance is the ability to use it as a sort of investment fund. With most policies, each payment you make is placed in a cash value account that grows at the specified interest rate of your policy. Once the account reaches a certain size, you can borrow money from without credit checks or qualifications.
Step three is to think about how much money you can spend on life insurance each month.
The best way to figure this out is by making a budget and seeing what other payments take up most of your income.
The benefits of this are two-fold
- First, you can see all your family’s expenses in one place, meaning you can predict exactly how much cover you need to provide for them in your absence,
- Second, you can see how much ‘profit’ you make each month from your income, helping you decide whether you can afford that premium, or whether you need to cut down on certain expenses.
You may be able to afford life insurance if you cut back on spending for a few months or even years, but it’s also okay to change your budget so that payment is easy every month.
Step four is to decide on your beneficiaries.
This is simply who will be awarded the proceeds of your policy in the event of your passing. In most cases, policies are awarded to spouses or next of kin. It’s suggested you avoid naming children and minors as beneficiaries unless they are older, as minors may not be eligible to receive funds, or funds may be heavily taxed. If you would like your proceeds to go to minor children, consider awarding your proceeds to an adult you trust to ensure this happens. Trust funds are a common way of doing this, and many people determine how they would like their life insurance proceeds to be used by writing it into a Will.
If you are still uncertain, many insurance companies offer no-obligation life insurance quotes online to help you understand how much you need to invest for the cover you need, and many of these companies will be able to guide you through the policy that’s right for you and your family.