Deciding whether you need life insurance can be boiled down to a simple equation. If you have something precious to lose, you should insure it. But why do so many people dismiss life insurance, while diligently protecting things like cars, property and personal items? Maybe it’s fear – no one wants to think about getting sick, injured or worse.
The reality is we all have something to lose, and for many of us, our income is essential. Life would change pretty quickly if, for whatever reason, you had to stop working and the money stopped coming in. In this article we explain the different types of cover that fall into the life insurance category and help you understand what needs protecting in your world and how you can go about it.
What Is Life Insurance And Do You Need It?
Life insurance is a catch-all term encompassing four different insurance products that protect you and your loved ones financially if the unexpected happens. These include life cover, total and permanent disability (TPD), income protection and trauma insurance.
When deciding if you need any or all four of the common life insurances, consider who you’d be leaving behind and what financial resources they’d require if something unexpected happened to you. For example, if you don’t have kids, you might think you don’t need ‘death cover’, but if you have liabilities like a mortgage or business debt, consider who might be burdened with the loans when you’re gone or unable to work.
Life Cover
We hate to be morbid, but there’s no getting around it when talking about life cover, also known as 'death cover' or 'term life insurance'. A sudden death, or terminal illness diagnosis, can place extreme financial stress on those who depend on you. Life cover will help them pay the bills and other living expenses like school fees and mortgage repayments.
Whether or not you have kids or dependents is the number one factor when deciding if you need life cover. If you’re young and in the early stages of your career, you might need it. Depending on who and what you’d be leaving behind, our private wealth and life insurance advisors can help you understand how much life cover you need.
Total and Permanent Disability Insurance
It’s all in the name. TPD insurance covers you if a permanent injury or illness makes it difficult or impossible to return to work. It provides a safety net to support you and your family with payouts to support living costs and medical and rehabilitation costs. Insurers have different definitions of what it means to be totally and permanently disabled, but generally you can be covered in the event you can’t return to your current occupation, or covered in the event you can’t return to work at all.
When deciding if you need TPD insurance, add up all the expenses you’d have to cover if you need to stop working. Once you understand these costs, consider how much could be covered from savings, what medical costs might be covered by health insurance and what other financial support would be available to you. If there’s a big gap to fill, you’d be wise to take out TPD insurance.
Income Protection Insurance
Anyone who has an income has something valuable to lose. Your income funds your lifestyle, as well as supporting dependents and contributing to retirement savings. Income protection insurance is designed to replace your income based on annual earnings in the 12 months prior to an illness or injury that stops you from working.
Of all life insurances, income protection is one that everyone should consider . Even if you don’t have kids or a mortgage, think about what might happen if you temporarily lost your income. You might end up having to sell the car, or worse, move back in the folks!
Trauma Insurance
Trauma insurance pays a lump sum amount if you suffer a critical illness or serious injury. It’s also referred to as critical illness or recovery insurance. Again, all insurers have different definitions, but a good policy will cover you for cancer, a heart condition, major head injury or stroke, but trauma insurance does not cover mental health conditions.
Deciding if you need trauma insurance will be a similar process to TPD insurance. Do you have funds available to cover your expenses and medical costs if something unexpected happens? If not, consider getting trauma insurance as part of a life insurance package tailored to your individual needs.
Understanding Life Insurance and Superannuation
Unless you instruct them to switch it off, chances are your super fund is charging you for some form of life insurance. Most super funds offer life cover and TPD by default, with income protection also available. While there are tax benefits to having your super fund pay your life insurance, in our experience working closely with insurers and reviewing the policies included in our clients super funds, our frank assessment is that superannuation insurance is generally not enough.
You may wish to replace the default policy offered by your fund with a tailored product that better suits your needs. Once our advisors have determined the best product for you, the insurer writes to your superannuation fund and advises them to pay the premiums with your contributions. This means you get to keep more of your take home pay.
Protect Your Business’s Greatest Assets With Group Life Insurance
Employees are a company's greatest asset but what happens when one of them suffers an injury or illness and is unable to work? Group life insurance can protect both them and your business. It involves a single contract covering a group of people where the insurer agrees to offer insurance without requiring detailed personal information on each person's current and previous health status. This means no exclusions for pre-existing conditions, however the group insurance can exclude things like mental health cover to reduce premiums.
Aside from being a fantastic perk to attract staff, group life insurance premiums are tax deductible to the employer, do not attract GST or fringe benefits tax, and can pay out in the event of a business partner dying or experiencing TPD.
How Much is Life Insurance?
With all life insurance, the cost of your premiums will be determined by a range of factors unique to you. These include:
- If you’re a smoker or non smoker
- Where you live
- Your industry
- Your age
- Your income
- Pre-existing health conditions
- Exclusions or loadings
When you sit down with our life insurance advisors , your unique situation is considered carefully to determine what level of cover you require. A range of factors and data points are analysed and quotes will vary depending on your desired payout amounts, policy exclusions and more.
Is Life Insurance Tax Deductible?
You can claim a tax deduction on the premiums paid for income protection insurance, but it's important to note that any payout you receive is also tax assessable. Premiums paid on life cover, TPD and trauma insurance are generally not tax deductible, and neither is your income protection if it’s taken out through your super fund with premiums deducted from your contributions.
Is Mental Health Covered Under Life Insurance?
Yes, illness and disability arising from mental health conditions is covered under some policies and claims have been on the rise in recent years. According to research from the Financial Services Council, claims for mental health conditions doubled in the five year period from 2014-2018 to total 11% of all disability income claims.
These claims can range from serious mental health conditions to cases of stress that require people to take time away from work. Like many other health issues, mental health can be excluded from your policy and often results in drastically reduced premiums.
Review Your Life Insurance Levels
Our Private Wealth advisors offer market-leading advice tailored to your evolving circumstances and life goals. Get clarification on your life insurance policy or find a new policy that’s right for you. With access to a wide range of policies and providers, we’re able to review your life insurance levels and make tailored recommendations on how to help you achieve the desired outcome. And best of all, a review of your life insurance policies is free!
Get in contact with our life insurance advisors today to set up a meeting or get a quote.
