About to change your life insurance policy? Not so fast. There's a few important things you should consider first.
Whether you have decided to change your life insurance due to a change in your circumstances, financial reasons, or simply due to your current policy reaching the end of its term, it is still a decision which must be carefully considered and researched before you make the move. Some questions you should ask yourself are:
- Is there a different type of life insurance policy that is now more relevant to me?
- If I switch providers will I need to get reaccessed?
- Will taking out life insurance through my superannuation be beneficial to my current situation?
No matter what your reasons are for changing policies, you should take the time to understand what happens when you change to ensure you are making the right choice.
What should I take into consideration when changing my policy?
In the past, when whole life insurance was at the height of its popularity, deciding to change your policy was a much more complex process, with people having to factor in things like the policies cash value versus inflation. This sort of life insurance is no longer available in Australia, having been replaced by the much easier to understand term life insurance.
That being said, this doesn't mean you should rush in and commit to the first offer given to you. Some crucial things to think about when changing your life insurance are:
- Whether a different type of life insurance better suits your needs now.
- If taking out your new policy inside of superannuation would now be beneficial.
- The extra cost that a new policy could incur.
- Your age, as taking out a new policy later in life will attract higher premiums.
- The stability of the new life insurance provider.
- The reputation of the life insurance agency and experience of the agent you are dealing with if you are using this service.
I want to change the type of life insurance I have, what's available?
There are a range of policies available that are considered life insurance, with each being designed to cover different events and suit different needs. Therefore, if you are thinking of taking out a new policy you might find that one of these is now more relevant to your requirements. Here is a brief rundown of the types of life insurance available in Australia:
- Life cover. What most people think of when they hear the word 'life insurance'. Pays a lump sum benefit to the policyholder's beneficiaries in the event of their death.
- Income protection. Provides an ongoing benefit to replace the policyholders salary if they are rendered unable to work due to illness or injury.
- Trauma (critical illness) cover. Provides a lump sum benefit if the policyholder is diagnosed with a specific serious illness.
- Total and permanent disability (TPD) cover. Provides a lump sum benefit in the event the policyholder suffers a serious disability that prevents them from either working at all, or at a diminished capacity.
- Accidental injury cover. Provides a lump sum benefit if the policyholder suffers a serious injury due to an accident.
- Accidental death cover. Provides a lump sum benefit to the policyholder's beneficiaries in the event of their death due to an accident.
- Funeral cover. Provides a lump sum benefit to pay towards the costs of the policyholders funeral.
Why would I want to take out a new policy inside super?
Purchasing a life insurance policy through your superannuation fund can be beneficial, but like all things also has its drawbacks. Once again, deciding whether or not this is the best option for you boils down to your specific life insurance needs. Here are some of the main advantages and disadvantages of taking out life insurance inside super:
As you can see, this life insurance option can be a right or wrong choice depending on the person. For example, if you are changing life insurance policies due to financial constraints, the cheaper premiums and tax benefits of inside super life insurance is great. On the other hand, if you are wanting a more comprehensive level of cover than you currently have, this probably won't be as attractive.
Watch out for the churning trap
Churning is when an insurance agent misleads and lies to you in order to get you to cancel your existing life insurance policy and replace it with a new one. This was a very popular scam when whole life insurance was available in Australia, as they could draw down your existing policies cash value to cover the new one while gaining additional commission, which of course left you out of pocket.
With the removal of whole life insurance from the Australian market this practice has lessened, as term life insurance does not have a cash value attached to it. However, it has not been eradicated completely, as unscrupulous insurance agents can still hoodwink you into switching policies regularly to generate more sales and therefore more commission for themselves.
Some red flags to watch out for are if the agent:
- Warns you not to tell your current insurance provider and relatives about changing your policy.
- Tries to get you to sign an incomplete contract you do not understand.
- Badmouths other agents and insurance companies.
While the majority of insurance agents are honest professionals, the dishonest minority does exist. Therefore, it is very important that you always read the fine print carefully, and seek outside advice or guidance if you feel something suspicious might be going on.