Insuring for peace of mind: The importance of life insurance

4-minute read

Life insurance may also help ensure that the future a person has always wanted for their loved ones can still be a reality, even if they have passed away.

What can life insurance provide?

The primary purpose of life insurance is to offer a lump sum payment that can assist dependents and loved ones following the passing of the insured individual. This financial assistance can be utilised to address a range of expenses, including:

• Funeral costs
• Unsettled debts like mortgages, loans, or credit card balances
• Day-to-day living expenses, encompassing housing, education, and healthcare costs
• Replacement of income to guarantee the family's financial stability.

How life insurance works

When applying for a life insurance policy the applicant will stipulate or confirm the amount of life insurance required. This represents the financial benefit paid as a lump sum at claim time.

The insurer will ask a range of questions regarding health, medical history, occupation, and lifestyle to assess the application. It is important to answer these questions honestly and accurately as it may have an impact on premium costs or the ability to claim in the future. 

Beneficiaries can be nominated by the policy owner once the policy has been accepted. This is who may receive the proceeds of the insurance once a claim is processed.

Regular reviews of the life insurance policy are essential to ensure its relevance to personal circumstances. This becomes particularly crucial with changes in life events, such as significant debt reduction, marriage, childbirth, or starting a new job. Regular reviews help maintain alignment between the coverage levels and the individual circumstances of the insured person

Determining life insurance cover amounts

The insured amount can vary significantly among individuals based on their circumstances and priorities. Consider how much beneficiaries will need and for how long if a benefit is paid due to the insured passing away. Common things to consider when determining the level of cover required are:

• Repayment of debts
• Replacement of income
• Costs associated with housekeeping/childcare
• Children's educational expenses
• Day-to-day living costs

Once the amount of cover needed to cover expenses is determined, there may be the possibility of reducing this by exploring any existing cover already in place. For example, the insured may already have cover in a superannuation fund.

Factors that may influence the cost of life insurance 

The cost of a life insurance policy depends on many factors and differs from person to person. Some factors that may influence the cost of life insurance include:

Sum insured 

In general, the greater the insured amount, the more elevated the life insurance premiums will be.

Health 

The health and medical history of the individual seeking insurance plays an important role in establishing the premium of the policy. If the person has any pre-existing medical conditions, this could impact the premiums to pay, the ability to take out cover or the terms on which the person may be accepted for cover.

Additional policy features 

Additional features, like an inflation protection benefit and premium freeze option, can be incorporated into the policy, potentially leading to an increase in the overall premium amount.

Premium structures 

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’s best to compare life insurance policies across various providers to identify the most suitable option based on individual circumstances.

Other types of life insurance

It is important to consider other types of life insurance that can provide a financial safety net if a person suffers an illness or injury.

Total and permanent disability insurance (TPD)

Total and Permanent Disability (TPD) insurance provides a lump sum payment if a permanent illness or injury that is suffered affects the ability to work again, after a qualifying period and the required severity of the condition set out in the policy terms or Product Disclosure Statement (PDS) are met.  

Critical illness insurance (Trauma cover)

Critical illness insurance, also known as Trauma insurance, is a type of life insurance coverage that provides a lump sum payment if a specified illness or injury is sustained, subject to the completion of a qualifying period and meeting the severity criteria outlined in the policy terms or Product Disclosure Statement (PDS).

Income protection insurance

Income protection insurance is a monthly payment that replaces a portion of income if injury or illness prevents the ability to work and income is reduced after serving a waiting period. It is important to understand the different options and products available and compare policies with a variety of life insurers.