Life Insurance

If you have dependants (partner, children, elderly parents), then life insurance is probably something you have considered. Life insurance can insulate your dependants against financial difficulties in the event of your death.

What is it?

Within Australia, there are two major types of life insurance:

• term – which covers you for a finite period. If you die within that period, your dependants will be paid a specified death benefit; and
• cash value – which, similar to term life insurance, pays your dependants a specified death benefit plus a further redeemable value.

Term life insurance dominates in Australia, due to its relative simplicity and economy.

What does it cover?

Term life provides a cash lump sum to your dependants in the event of your death.
Most policies will pay this lump sum in the event that your death is due to illness and/or accident, however payment due to suicide is almost always excluded from policies.

How much does life insurance cost?

The cost of insurance is dependant on you - your age, gender, health, smoking status, family history – and the type and length of policy you are seeking.
If you are a 30 year old female in excellent health with no evidence of inherited familial illnesses, expect to pay less than a 55 year old male who is overweight and smokes. However, be aware that females are generally charged more than males due to statistics that show women make more claims.
If you are prepared to lengthen the time taken for a claim to be paid out, you may also reduce your premiums. This reduction could be as much as 25% if you lengthen the time taken to make a claim from 30 to 90 days.
Finally, premiums will differ depending on the length of your policy. A policy spanning 30 years will, naturally, cost more than a policy spanning five years.
As always, speak to your insurer to get an accurate idea of costs.

What are the tax implications?

The tax implications arising out of life insurance claims are complex and ever changing.

As these are constantly under review by the Australian Taxation Office, you are recommended to visit the ATO website (www.ato.gov.au) or speak to your financial adviser as to latest developments.

What is the terminal illness benefit?

If you are diagnosed with a terminal illness, and death is likely within 12 months, some insurers will advance the claim so that monies may be received before death.
And, proving that some insurers do have a heart, if you do miraculously recover, you probably won’t have to pay that money back.

Hints and tips when selecting a policy

Purchasing life insurance is far more complex than other insurance policies. Hence, when purchasing your policy, keep the following in mind:

• make sure you really do need it. If you are 20 years old with no dependants, there are probably better things you can be planning for than life insurance. Remember that life insurance is only really necessary for those with dependants;
• identify the type of coverage you are after. Short-term vs long-term. Short claim time vs long claim. It makes sense to know what you want before you approach the insurers; and
• shop around. There are over 40 providers of life insurance in Australia so take advantage of the choices available.