Life insurance can be an uncomfortable topic to talk about, but it is important to address the subject sooner rather than later. If you have dependents, life insurance should be a key aspect of your financial planning as you will want to make sure that your dependents are provided for in the case of unexpected illness or death.
Let’s have a closer look at what life insurance is and why you need to consider it.
What is Personal Life Insurance?
In a nutshell, life insurance is paid in the event of an accident, injury or death and is used to cover existing debts as well as to provide for your family in your absence. It can also be used:
To resolve debts such as personal loans, home loans and credit card payments.
To guarantee income or capital for a business in case a shareholder passes away.
To provide regular income to dependants for expenses such as living expenses, bills, school fees or child care.
What Type of Life Insurance is for Me?
That depends on what you plan to save for. In general, there are five different categories of life insurance policies for you to choose from:
1. Term Life Insurance
In a nutshell, term life insurance provides a fixed lump sum that is paid in the event of the life insured’s death. Term life insurance is generally used as to provide debt elimination and as an income replacement mechanism for the covered person. In other words, in the event of death, the beneficiaries of the policy will be given a fixed amount of money to pay for funeral cover, education of dependents, and mortgages. A positive aspect of this level of insurance is that it is inflation-protected, meaning that the payout amount will increase each year.
Once this type of policy is in force, it can only be cancelled at the life insured’s written request, or by non-payment of the premiums.
2. Living Trauma Insurance
As the name implies, living trauma insurance covers you should you become seriously ill. Although the illnesses and ailments covered will differ from policy to policy, they do generally tend to cover cancer, stokes and heart conditions. Living trauma insurance policies will cover between 40-60 predefined ailments so it is recommended that you compare policies before choosing one. The definitions of each ailment can and do vary between insurance companies, so it is very important that you review these definitions, or at least talk to someone who can do it for you.
The insurance will be paid as a single lump sum, which means that you are able to continue with mortgage repayments, household living commitments and other expenses while you recover.
One of the main benefits of a living trauma life insurance policy is that you can still receive a benefit even if you can continue working while being treated. There is no requirement to be absent from work to qualify for a payment. The payment is generally received tax free.
3. Income Protection Insurance
Income protection insurance is designed to provide you with a monthly income stream if accident, injury or illness prevents you from going to work. Income protection benefits are paid on a monthly basis which in turn allows you to continue living to your normal standards while you are off work.
While you may benefit from sick leave benefits, income protection insurance comes into its own when that sick leave runs out. It means that you can continue to put food on the table, petrol in your car and pay for your mortgage.
This is arguably one of the most important forms of insurance as it provides a safety net for you and your family.
Income Protection insurance has many different components that can and do affect the premium that you pay. It is not as straight forward as just deciding on the quantum of cover, like Life, TPD or Trauma. Factors like wait periods, benefit periods, stepped vs level structure, indemnity vs agreed value and a host of other factors need to be considered, which makes Income Protection difficult to compare against each other.
4. Business Overhead Insurance
As the name suggests, business overhead insurance is designed to protect your business in the form of monthly reimbursements should you be incapacitated due to illness or injury. Business overhead insurance lasts for a maximum period of 12 months and can be used to pay business-related expenses including rentals, salaries, superannuation and maintenance.
To qualify for this form of insurance, you need to be a legal business owner.
5. TPD (Total and Permanent Disability) Insurance
If a serious accident, injury or illness prevents you from ever working again, TPD insurance is a lump sum benefit that will help you pay for your living expenses and rehabilitation expenses. That being said, TPD benefits are not paid out as soon as the illness is contracted. Instead, the illness or injury has to affect your way of living for a 3–6 month period before your insurer decides that you are physically unable to work and are thus eligible for the benefits.
As is the case with most insurance policies, TPD insurance premiums take your age, lifestyle, gender and occupation into account. Manual workers are considered a higher risk than office workers and as such, should be expected to pay more for the same policy.
When is the best time to take out an insurance policy?
If you have a family and dependents, it is recommended that you consider taking out a life insurance policy as soon as you can. Having life insurance gives you that all-important peace of mind as your family will never be left wanting in your absence. You may be fit and healthy right now, but as we all know, life has a habit of sneaking up on us and surprising us with unplanned events, so it is best not to wait until your health declines.
The information in this article does not constitute legal or financial advice.