Find a more suitable life insurance policy by asking a few questions before buying
At its core, life insurance will payout a lump sum to the chosen beneficiaries of a policyholder if they die or are diagnosed with a terminal illness while the policy is active. However, there are many additional options available and a lot of different insurers and policies to choose from. This can make the process of finding the right option a whole lot more complex than it really is.
Don’t get overwhelmed. Instead, try asking a few questions to help you find policies that are good for your situation and rule out the ones that aren’t.
Choose the right level of cover
Your level of cover refers to the total sum of money that you are insured for and will receive in the event of a claim. The higher your sum insured, the higher your premiums. Finding the right amount is therefore a balancing act between too little and too much.
How much cover should I get?
There are a few different ways to arrive at the right sum insured.
- Get an estimate from a self assessment calculator. Calculators can help you add all of your financial obligations that would need to be covered in the event of your death. This may include mortgage/debt repayments, education fees and everyday living expenses.
- Consult your financial adviser or insurance broker. They can help you conduct a more detailed cost analysis to plan for your family in the longer-term and in more detail.
What expenses will my family have to cover in my death?
Typical expenses may include:
- Short term expenses after death, including funeral costs and administration fees.
- Income needs. The amount required to cover your family’s living costs.
- Mortgage repayment amount. If you have a mortgage then it’s a good idea to factor in how much it will cost to repay.
- Education costs for all of your children.
- Retirement funding for your partner.
Will I have to take a medical or blood test?
Some life insurance companies will require you to undergo medical or blood tests before you can sign up for cover. Generally however, you will only be required to undertake a medical or blood test if you are over a certain age or suffer from a pre-existing medical condition.
Policies that do not require medical or blood tests are more aimed towards applicants with pre-existing conditions, ongoing medical issues or overall poor health.
- If you are in good health and do not have any pre-existing conditions then the most suitable policy for you is probably one which requires testing.
- If you are in poor health or have pre-existing conditions then you will probably not benefit from a policy which requires testing.
Stepped, level or hybrid premiums?
You may have the choice of either stepped, level or hybrid premiums.
- Stepped premiums start off low but increase as you get older. This makes them more affordable in the short term, but considerably more expensive in the long run.
- Level premiums stay consistent over the course of the policy. These usually cost more at first than stepped premiums to begin with but actually work out to be cheaper over the course of the policy.
- Hybrid premiums combine both stepped and level. They will stay the same for a set period of time, and will increase in a set period of time. Different insurers offer different hybrid premium options.
Decide what type of life insurance you need
There are more life insurance options than there used to be, and an increasingly competitive marketplace is leading brands to offers more deals and extras, like packaged trauma insurance and income protection. These are also available individually, but bundling them with life insurance can sometimes be more cost-effective. Simplify the situation by breaking it down into a few key questions.
Do I need cover for serious injury and illness?
Trauma Insurance will pay lump sum benefits if you are diagnosed with a serious illness like cancer or suffer a severe injury like the loss of a limb. The difference is that you don’t have to die to get trauma insurance benefits. The conditions covered by trauma insurance can be found in the product disclosure statement (PDS). It will only pay benefits in the event of one of those clearly listed conditions.
What happens if I become permanently disabled?
Most life insurance policies also offer cover for total and permanent disablement (TPD). Sometimes this is automatically included and sometimes it’s an optional extra. If you are the sole breadwinner, TPD might simultaneously cut off your family’s income while also imposing new expenses. For this reason, if you are not already covered for it with a different policy, then including TPD on life insurance is highly recommended.
Do I need benefits for being temporarily unable to work?
In other words, what would happen if you were unable to work for a full year? Income protection will pay an ongoing benefit of 75% of your usual income, until you are either able to return to work or reach the benefit limitation.
It is different to TPD insurance as benefits are based on your inability to work rather than for the disability itself. Some policies might cover you if you’re unable to work your usual job while others might only pay out if you can’t work any job at all.
Decide which extras you want
You can choose extras in the form of additional built-in policies like those above, but will also have other additions and flexibilities to choose from. These vary between insurers and policies, but can provide useful features. Some are automatically included in most policies while others are not.
- Advance benefit payment: Many life insurance policies include advance benefit payment of up to $15,000 to cover funeral and other costs that may arise immediately following death.
- Benefit indexation: Benefit indexation for inflation is an option you can select to have your benefits increase with inflation, usually to a maximum of 5% per year.
- Adjustment to sum-insured: Not all policies will let you freely adjust the sum insured or other terms of your policy. If you expect changing circumstances in the future and anticipate the need to top up or increase your cover later on, then you may wish to look for this option. At the very least confirm with your insurer whether or not you are able to make adjustments later before signing a policy.
What won't I be covered for?
What types of injury and illness are excluded?
Death, injuries and illnesses are usually excluded if:
- They are the result of a pre-existing condition
- They are self-inflicted injuries or suicide within the first 13 months of taking out a policy
- They were acquired while you were doing something illegal, or were the direct result of you doing something illegal
- They were caused by an illness diagnosed before you took out the policy, or shortly afterwards within the waiting period.
- They were caused by injuries incurred before taking out the policy, or within the waiting period
- You failed to seek medical attention for injury or illness when any reasonable person would have
- They were the result of severe drug or alcohol misuse
Are any activities or occupational hazards excluded?
Your insurer may exclude injuries or deaths resulting from certain dangerous activities or hazardous jobs. Some of these are usually built into the policy, such as:
- No benefits for injury or death while working underground in a mine
- No benefits for falls if you’re a high altitude worker
- No benefits for specified highly dangerous activities like cave diving
Sometimes these exclusions will be automatically included in the policy, and you should consider finding a different option if they affect you, while other times the insurer might apply special exclusions to your policy alone. If you are having difficulty getting cover for dangerous jobs or pastimes then you should discuss the matter with your insurer to discuss the actual nature of the roles in your occupation.
What else is not covered by my life insurance policy?
The total list of exclusions varies between insurers, but most also have:
- Age limits. Policies will typically expire when you reach a certain age. This is usually 75 or 80, but might also be as low as 65.
- Rejections. Many insurers will outright decline to cover you if you have a history of health issues, excessive injuries or multiple pre-existing conditions
Should I buy direct or use an adviser?
Both buying direct and going through an insurance broker or adviser have pros and cons.
- Cover can be put in place online over the phone quickly with no additional tests
Benefits of buying with a broker:
- They may be able to get policies you couldn’t get by yourself
- They can compare more options and assess for extras
- They are able to liaise with the insurers, negotiate deals and find bargains
- They can offer a wealth of advice and information, and answer any questions you have