What is life insurance and why would you need it?

Protecting yourself and your family is pretty important, but the world of personal life insurance can be daunting and confusing. There seems to be 100’s of products and types of insurance that you should be considering. Outlined below are the 4 main types of insurance, and what you should be considering when determining how much you actually need.

Life insurance (industry term- Term Life)

This type of insurance is designed to protect you and your loved ones with financial protection should you pass away or become terminally ill. When determining the amount of cover you need, we take into account your debt, your family’s ongoing income requirements, final expenses, children’s education and any other specific expenses that personally relate to your family situation.

This insurance pays a lump sum to you (or your family) in the event of death or terminal illness. Depending on your situation, this type of insurance can be held within your superannuation fund too, meaning the premiums are paid out of your super balance.

Total and permanent disability insurance (industry term- TPD)

Similar to life insurance above, TPD insurance aims to provide you with a lump sum should you become totally and permanently disabled. This insurance protects you should you become severely injured or disabled, leaving you in a position where you will likely never work again. If that happened, what ongoing expenses would you have? How would your family meet your debts?

You should take all of this into account when determining the right level of insurance for you. As well as the above factors, you need to consider potential medical expenses that you may have. If you became permanently disabled, it is likely that you will need treatment and/or ongoing medical therapy. A financial adviser should factor this in when determining exactly what insurance you need.

Income protection (industry term- Salary continuance insurance)

One of the best assets we have is the ability to earn an income. If that was taken away from you what would you do, and how would your family get by? Sometimes we find ourselves off work for an extended period to no fault of our own and income protection is there to help you through this period.

Income protection can cover you for 75% of your income whilst you are unable to work. This means that bills still get paid and you don’t have to stress about running out of sick leave or holiday leave. A payment is generally made to your account monthly until you return back to work, or until your benefit period has expired.

Trauma insurance (industry terms- critical illness,  living insurance)

Most people haven’t heard of trauma insurance, but this type of insurance can make all the difference. There are certain medical events that occur that don’t leave you totally disabled, but have a massive effect on your life all the same. You also may not qualify for income protection because you may still be able to work with certain illnesses.

This is where trauma insurance comes in. Traumatic events include illnesses such as cancer, heart attack, stroke and tumours. In some of these circumstances, you will be able to work, but do you really want to? If you were diagnosed with cancer, would you like the option to take 1 year off work to focus on your recovery?

Trauma insurance provides a lump sum payable if you meet the requirements of up to 40 different medical conditions. Whilst you can cover your debts with this insurance, one of the main reasons people get this insurance is to cover any potential medical expenses you have to pay for treatment and recovery.

Common misconceptions

As many people don’t truly understand insurance, there are often some preconceived ideas floating around that are just plain wrong. The following are very common misconceptions when it comes to insurance.

–       I don’t need life insurance because I have private health insurance – Don’t get me wrong, private health insurance is great and I promote this, however it is not the same. Private health insurance (depending on your level of cover) only covers you for private hospital stay and maybe some extras (think physio etc). There is no ongoing income replacement; there is no lump sum payable if you can’t work.

–       I don’t need income protection because I am covered by Workcover – Workcover is slightly different in each state of Australia, but to get to the crux of it, Workcover will only cover you if you are injured during work. This can include travel to and from work, but doesn’t include what you do on the weekends and doesn’t include any illnesses that you get that have nothing to do with work. If you are relying on Workcover solely then you have left a wide open gap for yourself.

The majority of people need some form of insurance but in Australia we have a massive underinsurance problem. If you have a debt or rely on your income, then I encourage you to review your personal life insurance needs for yourself and for the sake of your family.

– This post is from our resident senior financial planner, Cara Brett. Check out her details in our about us page.

Posted in: Finance 101 and Cara Brett