Insuring for peace of mind: The importance of life insurance

4-minute read

It serves to replace income, settle debts, and ease the financial strain during challenging times. Additionally, Life Insurance plays a role in safeguarding the envisioned future that an individual has for their loved ones, helping to ensure it remains achievable even in the unfortunate event of their passing.

What is life insurance?

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 requesting a life insurance policy, the applicant specifies or confirms the desired amount of life insurance, representing the lump sum paid at the time of a claim. The insurer will enquire about health, medical history, occupation, and lifestyle to evaluate the application. It is crucial to respond to these questions honestly and accurately, as it may impact premium costs or future claims. After the policy is accepted, the policy owner can designate beneficiaries who may receive the insurance proceeds upon a processed claim.

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.

Factors that may determine life insurance cover amounts

The insured amount can vary significantly among individuals based on their circumstances and priorities. Consider the needs of beneficiaries and the duration for which a benefit would be necessary in the event of the insured's passing. When determining the required coverage level, consider factors such as:

• 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 price of a life insurance policy depends on numerous factors and varies from one individual to another. Several factors that could impact the cost of life insurance comprise of:

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 

The two common premium structures offered by Life Insurers are Variable Age-Stepped (previously called Stepped Premiums) and Variable Premiums (previously called Level Premiums).

• Variable Age-Stepped Premiums
  • Are calculated based on the age of the insured at each Policy anniversary.
  • As the insured person ages the premiums usually increase to reflect the increased likelihood of claimable events over time.
• Variable Premiums 
  • Are calculated based on the age of the insured at the Policy start date
  • In earlier years these premiums are generally higher than aged stepped however in later years may be comparatively less than aged stepped because the annual premium does not increase with the insured age. 
• Also available from some insurers are Fixed and Fixed Age-Stepped Premiums, which sets the premium amounts and may be reviewed after a set period (e.g. one year). 

Premiums can also change due to any tax, duty or charge or changes introduced by government, or if the insurer changes their premium rates. Both Premium structures can change for a range of other reasons, please see the relevant product PDS for more details. 
 

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.