Beginner’s Guide to Life Insurance: Investing in the future with Life Cover

Educational Video: Life Insurance

It Could Happen to Any Everyday Australian Family

Not so sure if you may need Life Insurance? Maybe now is a good time to learn what it can mean for your family and your future.

Katie & John

Katie, 32, and John, 36, had been happily married for 10 years and were proud parents to two young children; James, 8 and Lily, 6. John was a Business Development Manager and earned $130,000 a year, while Katie was a full-time stay-at-home mum.

One day, just after she picked up the children from school, Katie received a phone call from the hospital. John had been in an accident. He had been running late to a business meeting and was struck by a car as he crossed the street to his office. He was taken immediately to a hospital. When Katie arrived at the hospital, she was informed that John had severe internal injuries and the doctors were performing an emergency surgery. Two hours later, John passed away.

Katie's overwhelming realisation of John being the main financial provider to the family was materialised by the devastation of his death. Having to care for young children who had just started school meant that there were education expenses and living costs to keep up with for many years to come. Then, there were also mortgage repayments to be met. Katie thought, how could she afford all of these expenses if she had not worked since they had their children?

Luckily, John had life insurance. When he and Katie took out a mortgage for their first home and had their first child, John realised the importance of having some kind of financial backing in place should anything ever happen to him. With the help from a financial adviser, taking the time to consider his families needs and research the different policies available, he purchased a term life insurance policy.

The lump sum payment from John's life insurance helped Katie get the family's finances in order and focus more on the future. She was glad that the proceeds could be used to pay for John's hospital bills and funeral expenses. But ultimately, she was grateful that she could continue to look after their children and provide for them, as well as pay off any outstanding debts.

Katie learnt a very valuable lesson from this event, which influenced her decision to take up a term life cover on herself with additional policy options, nominating her two children as the dependant beneficiaries.

She realised, had it been the other way around, that if she was the one who got in an accident, and not John, what happened then would have been very different. Being the uninsured parent, Katie's death would've result in John carrying all the financial burden. Other than keeping up with the mortgage, day-to-day household expenses, and education costs, He would also have to take a few months of unpaid leave to look after the children and maintain their home.

Now insured, Katie had one less worry on her plate, knowing no matter what should happen to her in the future, her children would be taken care of.

Underinsurance of Australian families

Australia has emerged as one of the most underinsured nation in the developed world. As much as 95% of families do not have adequate cover, which means that one in five will be affected by the death of a parent, or by serious injury or illness which causes a parent to be unable to work (Lifewise/NATSEM, 2010).

According to Investment and Financial Services Association (IFSA), while 62% of male Australian parents have life insurance, female parents make up a much smaller portion of Australia's insured population.

In a recent survey conducted by Westpac in 2012, it was uncovered that as many as six out of ten Australian women (59.2%) do not have life insurance. What's worst, it was discovered that 50.9% of them admitted that their partner does not have life insurance either.

A report by AXA in 2007 found that Australians are fully aware of possible life risks such as serious illness, accidents and disasters happening, but decide to take an 'out of sight, out of mind' approach. Westpac's survey also revealed that nearly 68% of Australian women who do not have life insurance, are not at all interested in taking out life insurance. That is almost seven out of ten women.

The reality is that Katie's story can happen to anyone. Australians may have long held the attitude of 'she'll be right mate,' but remember, when it's about your family, you are putting them at great financial risk.

Learn more why life insurance is important for women

In retrospect, are you willing to take a chance on the future of your family if anything should happen to you or your partner, and hope for the best if you have no life insurance?

Will you have enough finances to fund the medical expenses that arise if your partner has been diagnosed with a terminal illness, with only 12 months to live? What about funeral expenses and legal fees that may arise in the event of your partner's death?

Whether or not you are employed at present, consider if you would be able to support your family by meeting the daily living expenses, keeping up with bill payments and continue your children's education for many years to come without your partner's income?

Life Insurance - It's Not as Complicated as it Sounds

Life insurance can provide support to your financial dependants (usually immediate family members) with a lump sum benefit in the event of your death or if you have been diagnosed with a terminal illness and are not expected to live for more than 12 months.

There are other types of life insurance that are designed to provide protective coverage in the event of serious illness or permanent disability.

The proceeds from life insurance can be used for:

  • Replacement of lost income
  • Daily living expenses
  • Rent or mortgage repayments
  • Bills
  • Short-term debts: credit card, personal loans, car loans
  • Education expenses
  • Medical expenses
  • Burial costs
  • Outstanding tax
  • Legal fees

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Provides a lump sum payment if you become totally and permanently disabled and are unable to return to work.
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Rates last updated December 10th, 2016
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Different types of insurance for different types of needs

Term Life Insurance

Term life insurance provides financial relief to your dependents with a lump sum payment in the event of death. If you have been diagnosed with a terminal illness with 12 months to live, a benefit amount will also be payable for most insurance providers. Term life insurance is the cheapest type of life insurance, because you have the option to choose how long you would like to be covered for. Term lengths that are generally available range from 5, 10, 20, and 30 year.

To choose an appropriate duration of cover, it is important to assess your current stage of life and your financial circumstances. You may want to consider taking out life cover at the time your financial commitments are the greatest. If your partner is to pass away during that time, the benefit from the life insurance policy will be able to help alleviate some of the financial strain. As an example, people who are in their mid 20s to mid 40s may consider that a 20 year term policy is better to suit their needs. By the time their life insurance policy expires, their children would have completed their education or commenced full time work and they may have accumulated enough funds to cater for retirement.

Choosing The Appropriate Term For Your Life Insurance Policy

John's 20 Year Term Life Insurance Policy

Katie and John's first born, Jack, had only just turned two years old when he took out his life insurance policy. Taking his financial adviser's recommendation, he decided on a 20 year term life insurance policy. He wanted to make sure that his family would be taken care of financially should he pass away when the policy was in place. He also thought that should he outlive his life policy, James would be 22 years old and hopefully by then, he would have completed his education and be financially independent. The mortgage would be mostly paid off and he had contributed enough into his superannuation should he decide to retire.

When they had their second child, John realised that he had to review his life insurance policy. Another child meant that there would be additional expenses to the existing finances and he had to take into consideration her future education fees too. So, he increased his existing coverage and made sure it would be enough to cover his family financially in the future.

Total and Permanent Disability (TPD) insurance

With TPD insurance, you (the policyholder) will receive a lump sum benefit if you have been deemed totally and permanently disabled, and are unlikely to return to work again.

Unlike term life insurance, TPD insurance is designed to be a form of living insurance which provides coverage if you are suffering from a long-term disability, which impaired your capability to return to your usual full-time work ever again. TPD insurance can be included in your existing life insurance policy to provide you with a more comprehensive coverage.

Trauma Insurance

Trauma insurance provides a lump sum benefit when you have been diagnosed with a life-threatening illness or injury that is specified in your trauma insurance policy.

The conditions that are covered by trauma insurance will vary between insurance providers, so it is important to do your research and compare different plans to know exactly which events you are covered for. There some core conditions that are generally covered across trauma insurance policies:

  • Cancer
  • Stroke
  • Heart attack
  • Coronary artery bypass
  • Loss of limbs
  • Major organ transplant
  • Kidney failure

You also have the option to include trauma cover in your existing term life insurance policy, which can help relieve medical expenses and rehabilitation costs when you have been diagnosed with a debilitating illness such as cancer or stroke.

Adding Extra Benefits To An Existing Term Life Cover

Katie's Trauma Cover as Protection Against Cancer

Katie's family had a history of cancer, with both her mum and grandmother being breast cancer survivors. She was aware of the possibility of being diagnosed with illness in the future with her family's medical history. She wasn't taking any chances, so she decided to add another layer of protection with trauma benefit, into her term life policy. So, just in case she had fallen ill, the trauma benefit from her policy would be able to cover any expenses and hire a help to care for her children.

Life insurance: It's Never Too Late to Have the Protection You and Your Family Deserve

Life insurance is something everyone should consider and is not necessarily just for those who have a family. You may have other people in your life that rely on you financially, who may also suffer in the event of your death, such as your siblings or aging parents.

No one can predict the future. Hundreds of Australian families are struck by unexpected illness, injury and death each year. This loss can have devastating impacts if the right amount of financial cover is not in place.

Katie and her family are just like any other Australian family, who realised that having a life insurance policy in place is the best investment they ever made. So, why wait? Have the peace of mind you and your family deserve with life insurance - it's as simple as that.

Maurice Thach

Maurice is a publisher for finder.com.au. Daily research of Australia's insurance offerings allows him to breakthrough the noise of the many policies out there to uncover what can (and can't) be covered. Maurice hopes to make finding the right insurance easier for all.

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