When you consider the main reasons why people take out life insurance – to cover death expenses, to replace income and to pay off a mortgage – it’s clear that it equates to peace of mind for them.
But it’s important to be clear about why you want to purchase a life insurance policy to make sure that you are adequately covered. Recent research shows that if half of Australian families had to call on their life insurance policy, they would find only 47% of their basic needs were covered.
The vulnerability of many Australian families is highlighted by another study that found that a third of respondents would rely on friends and family, while others would sell off assets and even sell their family home to help them cope financially if they contracted a major illness and couldn’t go back to work.
Another study found that 70% of Australians in the 41 to 50 age bracket were very concerned about how they and their dependents would cope financially if they were to die prematurely or becoming disabled.
What all this research suggests is that Australians are in fact under-insured – our life insurance premium as a proportion of GDP is much smaller than in comparable developed countries4. For example, it is 1.5 times smaller than in Sweden, and 2 times smaller than in Japan.
Before you can get the life insurance coverage you need, it’s important to understand why it’s an essential product for you. Some of the most common reasons include:
1. Income replacement
Life insurance will provide financial security to your family in the event that you pass away, to help maintain their quality of life. What if your spouse needs to return to work, how would this affect your family? This is especially true if your loved ones rely solely on your income. You can calculate roughly how much life insurance you need by considering your salary and the number of years until your retire, but other factors will include other sources of income and savings.
2. Funeral expenses
With basic funeral costs running up to $10,000, a life insurance policy can take the burden off your beneficiaires and provide them with assurance that they do not need to worry about funeral expenses at an already stressful time. It is possible to pre-pay for your funeral to ensure that everything is in place for your loved ones after your pass away. However, there are risks involved in pre-payment.
3. Pay off debt
Your debts won’t just disappear if you die. Given that some of your debts may relate to mortgages, credit cards or other loans that you and your spouse have co-signed, your spouse may become entirely responsible for these. Would they be able to continue making mortgage or loan repayments without your salary? Life insurance allows those you leave behind to take care of financial responsibilities and allow them to hold onto the family home.
4. Education funding
You may not have considered that a life insurance policy is a viable way to provide money for your child’s education but insurance payouts can actually provide a good supplement to your savings. If your child ends up borrowing money to get through school, the proceeds from a life insurance policy could help offset such student loans.
5. Protect your business
It’s important to have life insurance if you own a business, it covers your financial obligations in the business and ensures your hard work doesn’t go to waste. If you’re involved in a partnership with someone else, you should both have coverage. That way if one person dies, the other isn’t left responsible for a heavy financial burden. You can also use life insurance to provide a tax-free cash infusion (borrowing against the cash value of a permanent policy).
Convinced that you need a life insurance policy? Check out life insurance quotes to find a policy that fits your needs.
Information in this post has been sourced from Tal’s Slice of Life Blog 2019, Nobleoak’s 2019 Consumer Behavior Transformation Research Paper, Metlife’s Insurance Inside Super Report 2019 and PCW’s Future of Life Insurance Report 2017.
“General Advice Warning: The content of this article is general advice only and should not be acted upon without first consulting an industry specialist as it does not take into consideration your personal needs, objectives or financial circumstances.”