Insurance 101: Everything you need to know about life insurance
You're not alone if you don't know a whole bunch of stuff about life insurance. But that doesn’t mean it's a bad idea—far from it! Most people figure out they need life cover when they are planning or starting a family, buy a house or if their loved ones are injured and out of work for some time, and then come looking for answers—which leads us here today!
What exactly does "life insurance" entail anyway? Let’s get down to business as I try to explain the basics of what it is, how it works, the different types of policies available, and some of the frequently asked questions about it. By the end, you'll hopefully get an overall insight into what life insurance is and whether it's right for you.
The 4 main types of insurance that you need to know about
All four of these insurances fall under the "life insurance" category because they protect you financially in the event of your death.
Death cover
Total & Permanent Disability (TPD) Cover
Trauma or Critical Illness cover
Income Protection (or salary continuance)
Death cover
What triggers a payout: If you die or if two doctors state that you have less than 18 months to live, your policy will be activated on all retail policies. (Check the details of your group and direct policies).
How is it paid: A lump sum.
How can I pay for it: Your bank account or from your super fund.
When do I need it: If you have financial dependents and debt that needs to be cleared for them.
Is it tax deductible: Death proceeds are not taxable outside super. Death proceeds are not taxable inside super if they are passed onto a sis dependant. if they are passed onto a non-sis dependant, they are taxable.
TPD cover
What triggers a payout: If you become totally and permanently disabled and is deemed that you cannot work ever again by two doctors.
How is it paid: A lump sum.
How can I pay for it: Your bank account or from your super fund.
When do I need it: If you do not have enough money saved to pay off your mortgage, buy a home, and fund your living expenses, and potential medical costs as well.
Is it tax deductible: If you're paid from a super fund, the cover is tax deductible to the super fund. You could then salary sacrifice pre-tax to your fund, making the cover taxed. So really, you need financial advice to assess whether increasing your cover is worth any potential taxes you might have to pay.
*In super, your TPD definition will be “any occupation”. This means that if you can work in “any occupation” that you’re reasonable trained for or suited to. You can have a linked amount of TPD cover which is held outside of super that is “own occupation”. This is a stronger definition, so if you can’t work in your “own occupation” ever again, you would be eligible to claim. They’re not going to make an accountant or engineer go to work in a grocery store if they had an “own occupation” definition. Statistically most “own occupation” claims would have been paid on the “any occupation” definition but you get one shot at this. So get advice!
Trauma cover or Critical Illness
What triggers a payout: A good retail policy will cover around 40 different critical illnesses, such as heart attacks, cancer and strokes. In most cases, 95% of all claims are paid out when the diagnosis is made—across all age groups. Other covered illnesses include major burns and loss of limbs (if you were in a car accident for example).
How is it paid: A lump sum.
How can I pay for it: Your bank account. This can’t be funded by your super account.
When do I need it: It is wise to have a financial buffer in place for medical expenses or extended leave from work if you or your spouse were diagnosed with a life-threatening illness.
Is it tax deductible: No, but the claim payments are tax-free.
Income Protection
What triggers a payout: If you've been off work because of an accident or sickness, there is generally a 30-day waiting period. That duration can be changed to 90 days if you have saved enough money in your emergency fund to cover the loss of income over those first three months. The choice is yours to change it to 90 days and save premiums, we can usually insure 70% of income including superannuation, and benefit period of age 65.
How is it paid: Via monthly instalments in arrears. You can insure 70% of your income and super. Typically the benefit period is until age 65 (unless you work in a high-risk occupation; it might be limited to a shorter period). If you suffer a TPD or trauma, you can still receive your income benefit in addition to the lump sum.
How can I pay for it: Your bank account or your super with a small portion paid via your personal bank account.
When do I need it: If you have an income (which is most people, stay-at-home parents, etc.)
Is it tax deductible: Yes! However, your monthly income instalments are taxed as income.
How you can get life insurance
We all have a plan for our future at some point. And if you're looking into Australia's life insurance landscape, then it makes sense that before making any decisions on what type of policy would best fit your needs, the first step should be an understanding of how these three main categories of life insurance available in Australia work.
Group Insurance
This is the type of blanket policy that you will find inside your superannuation fund. It’s the type of cover that may automatically come with your account. Super funds arrange this for their members as a group and in most cases the insurance is provided is not the actual super fund but rather a third-party insurance provider.
Pros
You can be automatically covered for a small amount without the hassle of going through a lot of processes, so you can relax and enjoy the peace of mind that comes with knowing your loved ones are taken care of financially if something happens to you.
Sometimes pre-existing health issues can be automatically covered if it’s a plan that your employer provides. For example, if you’ve had back injuries in the past, you may still be covered (unless exclusions apply). This is something you should check with your provider as each fund has different rules. These plans are called Group Plans as an employee benefit, generally. It’s best to check with your super fund on this, too.
Cons
Policies can be changed without prior notice, so you need to make sure you stay updated with all these changes.
You may need to have a steady income and may need to work via your super fund to make a claim.
It may be difficult to ask for an increase in cover. They may ask for some medical information and the policies may not exclude certain body parts – they just will decline the increase altogether.
Premiums may increase as you get older while the level of cover also decreases.
Direct Insurance
This is generally sold with your credit card, personal loan, or direct via the TV. You go direct to the insurer. Direct insurance can be a great way to get a policy through a reputable company, but it's important to make sure you're getting the best fit possible. The issue is that while some of the big, decent insurance companies have quality products, they also offer cheaper options that can be seen as low-hanging fruit for sales.
Pros
You go directly to the insurer without having to go through an adviser and cover can be issued fast.
Cons
Medical underwriting ensures that life insurance claims are paid fairly and accurately. This means they may medically underwrite at claim time so if you have an illness and make a claim—at that point they would ask your dr for a report to see if you had any symptoms or issues in the past. No certainty here.
The death cover can’t be made tax deductible (you can put a retail death policy in super and it’s then effectively tax deductible – not a direct policy).
I have generally only seen income protection benefits last for 5 years or less.
You also can’t set up a policy based on a level premium because the premium doesn’t increase year-on-year because of your age. With level premium insurance, your monthly payments won't go up simply because you're getting older. Your rates will be higher when you first take out the policy but won't increase too much as time goes on.
You can check out this YouTube video for more info.
Retail Insurance (this is the good stuff)
This is the life insurance you need if you want to be serious about setting up your sound financial house and protecting yourself and/or your family long-term.
You need to receive financial advice from a licensed financial adviser to obtain these policies. These policies are much better than anything else that is available because it's personalised to your needs.
The world is your oyster when it comes to financial advice, but you shouldn't be worried about seeing a specialist aka, financial adviser. If at 22 years old or younger with no life experience under their belt think that they're too young—then you can get rid of that thought asap! You are important and deserve every opportunity out there so get on board the bandwagon now before someone else takes away what's rightfully yours because of “ageism” in this industry.
Pros
They are not group policies or direct insurance.
Fully medically underwritten (they check your medical history then agree to issue the policy).
Speed and certainty at the time of a claim (many times your listed adviser will help with any paperwork, too!)
The policies are guaranteed to renew – once they are issued, they will renew each year as long as you keep paying.
Income protection can have a benefit paid until you’re age 65.
You are fully covered for accident and illness 24/7 worldwide (unless you disclose, you’re going on a holiday to Syria at the time of application – they would have an exclusion while you’re there!).
The ability to lock the price in at your age of application so the cost does not increase year-on-year because of your age.
Can be funded by your superannuation to ensure maximum tax effectiveness. Sometimes cheaper than direct and a million times better.
Cons
If you have health issues, the application process might take some time if the insurance company needs to write to your doctor or if they asked for a blood test or any other underwriting information.
I actually can’t think of any other cons in comparison to the group and direct insurance.
Premium types
Stepped premium – each year the premium steps up and increases as you get older. So, it’s cheaper when you take the policy out but will get more expensive over time.
Level premium – the premium is based on your age at application and does not increase year-on-year because of your age.
A lot of financial advisers seem to be torn on this—whether you should go for a level premium or a stepped policy. Personally, I'm a fan of level premiums, but I understand that in some cases a stepped policy or blend may be required. If you go with a good quality insurance company with a long track record, you'll be fine. You don't need to worry about chasing a cheaper policy every year like you would with car insurance. Minor reviews and tweaks may be necessary over time, but you can just go ahead and relax!
Commonly asked questions
Am I covered if I lose my job?
With income protection insurance, you’re only covered for accident or illness. Generally speaking, you would only insure yourself for things you can’t control. If you lost your job, you would be able to get some part-time temporary work if it was a dire situation. You should also have an emergency fund of 3 months of cash, if possible.
I’m young & single, I have no kids, and no debt. Do I even need insurance?
Yes. If you are working for an income, it means you need money to live. If this is the case, you need to protect this. If you think you do not need to protect your biggest asset, which is your income - why would you bother insuring your car? It’s not work nearly as much!
What is the absolute priority in order, if money is tight?
If you have kids or a family: Death Cover, Income Protection, TPD, Trauma.
If you’re single: Income protection, TPD then Trauma (however, most TPD policies should be linked to death, so you’d get it anyway).
I would still get all four covers while you’re young. The reason is cover is locked in while you’re healthy and at a young age. If your health changes in the future, you may not be able to get insurance at a good rate.
What if I can’t medically get insured with a good retail policy?
You would keep any cover in place that may be a default option in your super. You can then see an adviser who may have access to accident only income insurance or death cover for you.
If my spouse does not work outside of the home, do we need insurance for them?
Yes! If your spouse was to die, become disabled or suffer a traumatic illness, you need to ensure that all debt can be cleared and an amount to possibly provide for a nanny/housekeeper for death/TPD. For trauma insurance, you would want at least $100k for medical expenses for your non-working spouse and possibly some income replacement should the main income earner need to take time off work.
Can kids be insured?
Yes, generally speaking, any child in good health and over 2 years old can get a child cover policy. This is like a trauma policy but for kids. The maximum you can insure your children for is $200,000. The insured amount would be for medical expenses or to enable the parents to take leave from work should a traumatic illness occur on the life of the child.
"Peace of mind is worth its weight in gold, and that's especially true when it comes to life insurance."
Whether we like it or not, the inevitable can happen. They might be the stuff of nightmares and Hollywood blockbusters, but they're a reality nonetheless. The dreaded phone call in the middle of the night, the sick feeling in your stomach when you see the police lights outside your window, or that fateful knock on the door. No one wants to think about death or injuries, but accidents happen every day. And when they do, it's important to have a plan in place to financially protect your loved ones.
Technical stuff aside, book in a call with us to get started down the path towards financial stability. We're here to help sort out the cover you need so that you can live your life with one less worry.