Life Insurance: A Primer

Life is full of unexpected events, ranging from exciting to challenging. One event no one wants to think about is the end of life. Because of this, inadequate preparation can cause those who are left behind to end up struggling financially as well as grieving. Having adequate life insurance is a loving gesture that eliminates this unfortunate scenario. It should never be looked at as an unnecessary luxury.

Lesson One: Cover is Necessary

Life insurance is a serious consideration for both primary and secondary income earners in any household. It becomes even more crucial when there are dependent children involved. Some additional reasons to have adequate cover include the following:

o Mortgage debt
o Funeral costs
o Dependence of children in college
o The needs of elderly parents
o Unpaid debts

Lesson Two: How Life Insurance Works

The basic principle of life insurance can be simplified. A premium is paid monthly, annually or semi-annually to the insurance company. In the event of the policy holder’s death, the amount of benefit paid for is awarded to the beneficiary. Additional insurance products that fall into the life insurance category include:

o Income protection – in case of inability to work due to illness or injury
o Total & Permanent Disability Insurance – help when life-changing injury or illness strikes
o Trauma – cover for stroke, heart attack or other serious condition

Lesson Three: Making Good Choices

Choosing cover requires doing a little ‘homework.’ Start by figuring out how much cover is needed. Then consider the type of policy to get. Details will vary with different providers but in general, the types of cover available are:

o Term – the most common type. Purchased for a specific term, or number of years. Premiums are usually low and can be stepped or level. No cash value is built up and these policies cannot be borrowed against or cashed in.
o Whole or Permanent life insurance with higher premiums. These are paid throughout a person’s lifetime and a cash value that can be borrowed against is built up. This type of cover is no longer available in Australia.
o Money back policies that pay out when the term is up and cover has not been used.
o Life insurance that is a part of a super. It advisable to purchase additional cover.

Term life insurance is widely available and is usually purchased for a period of time ranging from five years and up. Benefit amounts can start as low as $25,000 or less and go up from there. Premiums vary accordingly. Getting quotes from several companies and making comparisons is wise.

Lesson Four: Applying is Easy

The application process can vary somewhat from one insurer to another. Eligibility is generally based on criteria such as:

o Age
o general health
o gender
o occupation
o whether or not a person smokes
o any pre-existing conditions

These things will also have an impact on the amount of the premium. A full disclosure is necessary, along with the provision of all pertinent personal information. Exclusions and limitations may be applicable, so it is important to read everything carefully. A Product Disclosure Statement should always be made available and should be fully understood. Often, combination packages and riders can be purchased, widening the scope of the coverage.

Lesson Five: Paying the Premium

Life insurance is a contract. If the premium is not paid, the cover is voided. Premiums also differ from one insurer to another and there are usually several options for payment. Variations can include:

o annually or semi-annually renewable contracts
o guaranteed level premiums (price stays same for term)
o return of premium (refund of all or part of premiums at the end of the term)
o stepped premiums (steadily raised yearly as ‘risk of death’ increases)

Lesson Six: Obtaining Peace of Mind

Navigation of the life insurance system can be tricky and time consuming. A qualified broker will guide you through successfully. Doing the research, getting the facts and getting covered will reduce stress and anxiety for you and your loved ones. Purchasing adequate life insurance should never be considered optional whenever there are loved ones, debts or mortgages that will need to be taken care of.