10 Feb Future Proof Your Family
Life has a habit of throwing us curve balls. How else to explain that every day in Australia 18 families lose a working parent and a chunk of their future income. That’s a strong argument for protecting your loved ones with adequate life insurance.
And it’s not just the breadwinner’s life that needs insuring. If a stay at home parent dies, it is estimated that the family income will drop by half! This is because the working partner will have to find extra childcare and or/housekeeping help or perhaps work fewer hours, all of which will squeeze the household budget.
How much cover?
The simplest way to work out how much cover you need is to subtract your current financial resources from your future expenses. And when you do so, remember that your debts don’t die with you.
It’s not just your mortgage you need to take into account but also your credit card and any personal loans as well as your day-to-day living expenses. Actuaries Rice Warner believe you need 15 years’ income to be fully covered and provide for those left behind in a standard of living they had become accustomed to.
Yet Rice Warner found that the median level of life insurance cover across the working age population only accounts for 64 per cent of basic life insurance needs and only 42 per cent of the amount needed to fully maintain the standard of living of remaining family members.[i]
Insurance within super
For most working Australians, a basic level of life insurance is available automatically through your super account. This can be useful if cash flow is an issue, as the money will come out of your superannuation contributions or balance.
However, life insurance within super is often not enough to meet your needs. The industry average for benefits payable from super is about $70,000, nowhere near the amount needed to provide ongoing support and security for your family.[ii] And if a payout is made to a non-financial dependent, they will pay capital gains tax on amounts over $50,000.
Insurance through super is a tricky area though, read our previous blog post on the matter for more information.
With all the ramifications of insurance through super considered, we would ideally recommended topping up your cover in a retail product outside super. The major difference between the two products is the underwriting process.
Underwriting – the real test
When you apply for a retail policy your risk is assessed via underwriting. By comparison, most policies within super are not underwritten and cover is automatically granted without any individual risk assessment.
While at first glance automatic acceptance may seem attractive, it does make sense to have an underwritten policy where the insurer assesses your risk through a medical examination or questionnaire as the cover will be tailored to your individual needs. Interestingly, industry statistics show that 93 per cent of people who go through the underwriting process will be accepted at standard premium rates.[iii]
The younger, the better
If you think you are too young to worry about life insurance, think again. The younger you are, the cheaper it will be (hurrah!). That’s because you will be deemed low risk and once the policy is in place the insurer can’t cancel it.
Next, you need to decide on stepped or level premiums. While stepped premiums start off cheaper, over time level premiums are more cost effective. If you are young and expect to hold the policy for a long time, level premiums are worth considering.
It is estimated that a 35-year-old non-smoking male seeking $500,000 cover will pay $30 a month in premiums while a female with the same profile would pay only $25 a month.[iii]
It’s always wise to know exactly what your policy includes. Some policies will pay out before death if you are diagnosed with a terminal illness. Others may cover suicide although they generally have a 13-month exclusion from the date the cover starts.[iv]
Making sure you have the right cover for your needs is vital. That’s what we’re here for so if you would like to discuss your options please contact us.