Comparing and reviewing Life Insurance cover

5-minute read

Understanding the timing and process for reviewing life insurance is paramount, as it may provide financial support for loved ones in case of unexpected events.

When to review life insurance cover

Reviewing life insurance coverage is an important step in maintaining alignment with the policyholder's individual preferences. The following are key occasions that merit consideration when reassessing life insurance coverage.

Major life events

Changing financial responsibilities, such as getting married, having children, buying a home, or retiring are all significant life events that may affect life insurance. These events change the financial responsibilities and may impact the need for life insurance. When these milestones are experienced, it is a good time to assess current coverage and whether it adequately provides for the insured’s family's future.

Changes in income

In the event of a significant change in income, whether an increase or decrease, the required coverage amount may be affected. If the family is dependent on the insured's income, it is prudent   to reevaluate the life insurance coverage, encompassing income protection, life, disability, and critical illness, to align with the present earnings and financial commitments.

Mortgage or debt changes

Fluctuations in debt levels have implications for the required amount of life insurance. The higher the amount of debt, the higher insured amount is required to cover or manage these financial obligations in the event of an unforeseen circumstance. Conversely, a substantial reduction in debt might allow for a corresponding decrease in the insured amount. It's important to note that adjustments to the insured levels will likely result in changes to premiums, and for more detailed information, it is recommended to consult with a financial adviser.

Changes in health

If there have been improvements in health, it presents a chance to reassess the policy and explore the possibility of obtaining improved terms or reduced premiums.

Planning for retirement

As retirement draws near, there may be a shift in financial goals and insurance requirements. Conducting a life insurance review can contribute to help ensure that the coverage aligns with post-retirement financial objectives, including supporting a partner, addressing end-of-life expenses, or leaving a legacy.

Separation or divorce

Life events like divorce or separation can significantly influence financial circumstances and dependents. It is essential to reassess any life insurance to ascertain whether modifications are necessary to accommodate these changes, including potential adjustments to beneficiaries and payees.

How to review life insurance

Ensuring life insurance is right for one's circumstances

The determination of the necessary life insurance amount depends on individual situations and the specific types of life insurance under consideration. Typically, insurance policies offer flexibility for adjusting the coverage and premiums to align with the insured individual's objectives. 

The following explores various factors that might be taken into account when calculating life insurance premiums.

Life insurance

Benefits from a life insurance policy are paid upon the death of the insured individual, it is important to consider the significance of the requirements of dependents and beneficiaries. Factors to take into account include outstanding debts, potential loss of income throughout an anticipated lifespan, educational costs, and funeral expenses. These financial obligations can potentially be mitigated by existing life insurance, investments, or savings. 

Total and permanent disability (TPD) insurance

TPD insurance provides policyholders with a lump sum payment in the event of total and permanent disability in either any occupation, their own occupation, or Activities of Daily Living (ADL), as stipulated in the policy document. The lump sum payment provides the insured the ability to use the proceeds as they choose. This could include such things as repaying debts, modifying their home for accessibility, and contributing towards medical costs including ongoing rehabilitation. This aids in giving peace of mind by reducing the financial burden.

Critical Illness insurance (Trauma cover)

Critical illness insurance, also known as trauma insurance, is a type of life insurance cover that provides a financial benefit if the condition and severity are covered by the policy. If a benefit is payable, it can assist financially in covering daily living expenses, enable the insured individual to access medical treatment and explore options related to their illness, all while supporting the quality of life for the insured's family during the treatment.

Income protection insurance

Income protection insurance works by offering a replacement income when the insured individual is unable to earn due to injury or illness. Benefits are usually paid as monthly payments representing a portion of pre-disability income. The specific percentage of income paid as a monthly benefit is contingent upon the pre-disability earnings, with many income protection policies typically providing a benefit of up to 70%. During the claims process, the monthly benefit amount is assessed, based on the lesser of the insured amount and a percentage of the individual's income at the time of the claim. Depending on the income protection policy or insurer, the coverage may encompass a contribution to superannuation, in addition to the benefit paid to the insured.

Life insurance premium management

Premiums are not fixed and can increase. There are two types of premium options - Stepped and Level. Stepped premiums are based on the insured’s age and generally increase at the policy anniversary date each year. Level premiums have the cost of increases associated with age spread over several years and are based on the insured’s age at the policy start date. This means the costs start out higher than Stepped premiums, but depending on how long the policy is held for, the cost may be lower at some point in the future. Both types of premiums may also increase if the insurer adjusts its premiums due to market conditions or other factors that may affect the policy including discounts or adjustments for inflation (CPI). 

It is a good idea to compare life insurance policies from various providers to identify the most suitable coverage for individual circumstances.

Policy term

Life insurance policies continue for the term of the policy with an annual notice from the life insurer explaining the cover, premiums, and any special conditions on the policy. This is an excellent time to review the cover. Check if there are any changes in the policy terms, premiums, or benefits. Evaluate if the policy still aligns with current needs and financial goals.

Regularly reviewing life insurance is imperative to maintain relevant coverage amounts aligned with personal circumstances and financial goals. Life is constantly changing and so are insurance needs. By assessing one's policy at these pivotal intervals, informed decisions can be made to help ensure adequate provision for loved ones and that insurance remains an integral component of one's financial planning.