Cost of Life Insurance is Great Concern for Australians
A 2013 survey from TAL insurance studying people who don’t have life cover found that of 1200 participants surveyed, 47% of respondents that were living in houses where the main income earner did not have life cover stated that they couldn’t afford life cover. The survey also found that life cover wasn’t necessary if there were other assets that could be drawn on following death. Alarmingly, 17% of respondents felt that they could receive the same level of cover from their health insurance and one in five stated that they did not need cover because they did not financial dependents.
The results of the survey not only help to explain some key reasons for Australia’s underinsurance crisis but also show some common misconceptions from people around how they will be financially supported following their death.
Health insurance benefits?
Health insurance is designed to give Australians access to affordable health care through free or subsidised hospital treatment, treatment by practitioners and access to prescription medicines. Health insurance will not provide an ongoing monthly benefit if the insured person is forced out of work due to illness or injury and it will not provide a lump sum benefit for a specified trauma condition or if the person is to pass away. Health Insurance may be able to provide some assistance while people are suffering their condition but it will not provide the same kind of benefit that will allow them and their family to maintain their quality of life into the future.
No financial dependents
Even if someone does not have a spouse and kids, death can still incur considerable expenses to surrounding family and friends that they leave behind, especially if they have a considerable amount of mortgage and other personal debt. Funeral costs, medical expenses, credit card debt, taxes, mortgage debt, legal fees, settlement fees and estate planning fees are just some of the expenses that may arise following death.
Its no surprise that the number one reason for most Australians not having adequate insurance in place is the cost. The sad thing is that many people make this assumption without actually undertaking a needs analysis and comparing different options that might be suitable for them. There are hundreds of different product options available in Australia, each offering different ranges of cover that is reflected in the final premium. People with limited funds to spend on life cover must realise that having some cover in place is better than having no cover at all and there may still be suitable basic insurance options that will offer the security they need.
This article will offer key insights on how to keep your insurance affordable.
Tips to Find Low Cost Life Cover
Analyse your situation and how much cover you actually need.
This will involve determining an appropriate level of cover for all financial obligations if you were to pass away to provide adequate support for any dependents so they may enjoy a good standard of living without you there to give financial support. This analysis will also help you determine how comprehensive your policy should be and if you can find a more affordable option that still provides the essentials.
Determining an appropriate level of cover of life cover
- Financial Dependents: Your spouse and number of children you have to support after you are gone. Consider food, clothing, education, holidays, vehicle and transport, bills etc.
- Mortgage Debt or Rent: Amount owing on your mortgage or monthly mortgage repayments.
- Funeral Expenses: Funerals can cost anywhere from $1000-$25000.
- Personal Debt: Consider credit card debt, car loan.
- Outstanding Taxes: Amount owing in taxes.
- Final Expenses: Financial Planning, Legal Fees and Estate Planning Fees.
A self-assessment calculator or budgeting spreadsheet can help you determine this amount prior to application.
Many policies will offer an additional range of benefits and features at an additional price that may not actually be suitable to everyone. This could include child cover, final expenses benefit, waiver of premium, needlestick benefit, trauma cover and TPD cover.
Trimming back on expensive extras can save applicants potential thousands in premium payments over the life of their policy. Basic life policies that provide essential policy features and benefits could be far more suitable for your situation.
Compare Policy Fees
While only a minor aspect of the final cost, it is worth comparing how policy fees can stack up between providers. Most insurers will charge an annual policy fee that can be anywhere between $70 and $100. Applicants may also be required to pay a fee for stamp duty on policies.
Consider the help of an Insurance Consultant in finding competitive quotes
Insurance advisers earn commissions from insurance companies so should provide advice to help you find products. Experienced consultants can use their knowledge of the market to help you find competitive options at an affordable rate by:
- Comparing hundreds of different policy options for you
- Explaining ways to structure your policy to reduce your premiums by looking at repayment schedule, waiting period, benefit period etc
- Knowing what providers are more likely to offer affordable cover if you bare extra risk to a consultant i.e. pre-existing medical conditions, dangerous occupation
Review features on your policy to find affordable life insurance quotes
In addition to the benefits and features of your policy, how you decide to structure your actual policy will play a major role in your premiums.
Stepped, Level or Optimum Premiums?
Policy applicants will generally have the choice of stepped, level or optimum premium payments for the life of their policy.
- Stepped: Will generally start out quite low and increase overtime with the insured’s age.
- Level: Will start quite high but remain the same for the duration of the policy.
- Optimum: Will start on a level basis before transitioning to stepped at a specified date.
If you are looking for low cost life insurance at this stage, stepped may be the right option for you. Stepped is usually used by people who are in the earlier stages of their life and have a limited budget for life cover.
The waiting period is the period of time that passes between when a claim is submitted to a benefit being paid. Unsurprisingly a shorter waiting period will usually incur a higher fee charge.
Most policies will offer a range of repayment frequencies to applicants. These will usually be weekly, fortnightly, monthly or annual repayment schedules. Generally, the more frequent the repayment schedule, the higher the premium charged.
Other insurance options that may be more affordable than Life Cover
There are other types of insurance offered by Australian insurance providers that while offering a reduced level of cover will be more affordable and generally only require minimal underwriting.
Will provide a lump sum benefit (usually to a maximum of $30,000) upon the policy owner's death. Cover is generally guaranteed and requires no medical underwriting.
Cover is generally only provided for accidental death in the first 12 months. Death caused by accident after the first 12 months will entitle policy owner to 3 times benefit amount.
Accidental Death Insurance
Accidental death insurance will provide a lump sum benefit ONLY for death that is a result of accident and in no way linked to their state of physical or mental health. Most policies will allow applicants to also include a benefit for accidental injury for an additional cost.
While these other options may not provide the same level of cover as a standalone life insurance plan, they are still good options for people that have struggled to take out life cover in the past and are only looking for a limited range of cover at an affordable rate.
Lifestyle Changes to help You Receive Low Cost Life Insurance
An insurance underwriter will consider a range of different factors to help them determine an appropriate premium rate for each applicant. The role of an underwriter is to work with a life insurance actuary to apply an appropriate premium rate for each applicant based on his or her level of risk. The applicants level of risk if found by considering factors of both their lifestyle and health.
Factors that may cause an increase in your insurance premiums:
- Dangerous sports/hobbies: Involvement in dangerous sports could cause a hike in your premiums or the insurer may exclude them altogether.
- Occupation: The level of danger involved in your occupation may also cause the insurer to apply a premium loading. Occupations are generally categorised as high risk, medium risk or low risk.
- Health Conditions: Pre-existing health conditions such as diabetes, heart disease and high blood pressure may result in a premium loading from the insurer. The presence of some conditions may result in a premium loading while others will only be considered if they are relevant to other conditions that are present.
- Weight: Insurers will use the Body Mass Index to determine if the applicant is of a healthy weight. If after further examination their weight is believed to be increasing the risk that they present, a premium loading may be applied.
- Smoking: Smokers can expect to pay as much as double in premiums for life cover.
- Alcohol: Moderate to excessive drinkers may receive a premium loading if the insurer perceives that their drinking is impacting their health. Applicants generally need to state how many standard drinks they have each week.
Reduction of premiums through lifestyle changes
Applicants that make key changes to their lifestyle such as giving up smoking, moderating their drinking, losing weight or reducing blood pressure can have their premiums assessed and possibly reduced. Smokers will need to have quit smoking for a period of 12 months before they can be recognised as a non-smoker.
Low Cost Life Insurance Through Superannuation
Purchasing life insurance through superannuation can be a suitable cover option for many for a number of reasons;
- Premiums are usually tax deductible as they are paid for from your super account as oppose to your after tax income.
- Policies are bought in bulk by the fund and as such are more affordable.
- Premiums are automatically deducted from your super so there is no impact on your day to day cash flow.
- There is reduced level of underwriting from insurers.
While there are some definite cost benefits of taking out cover through super, applicants should also be aware of the common pitfalls.
- Funds only offer certain types of cover.
- Applicants won't receive the same comprehensive level of cover found through standalone policies.
- Benefits paid to non-dependents will attract tax of 15% and Medicare levy.
- Claims will be paid to the trustee of the fund and then must be approved by the funds members before being paid. This can result in a significant delay to when benefit is actually paid.
Strategies to Secure Low Cost Life Insurance for Low Income Earners
Life insurance cover through superannuation
As previously mentioned, life insurance through superannuation can be a cost-effective way for low income earners to secure cover. Life insurance policies through super are cheap because funds purchase these cover in bulk and you are not be required to go through a medical exam when applying for basic cover. Your life insurance premiums are also deducted from your super balance, so you have more room in your monthly budget to spend on things that are important to your and your family.
Consider life insurance policies with simplified features and benefits
Comprehensive life insurance plans often offer a wide variety of built-in benefits and additional features that you can tailor to suit your needs and provide a more robust protection cover. However, these type of policies may not be affordable for applicants that are on a low income. Therefore, you may want to consider life insurance policies that offer smaller core benefits or with shorter cover period (five or ten years), depending on your individual needs.
What Would it Cost You Not to Have Life Insurance?
When you think of the alternatives it is hard to cost life insurance as you do other lifestyle products. Sure, you may well see out your life, carry out your ambitions and raise a good family without anything happening, most of us do, but, and it is a very big, but, what happens to your loved ones should you be taken from the scene when your responsibilities were at their greatest? Is it worth the gamble? You wouldn't dare gamble on your house not burning down nor would you gamble on driving your car down a public road whilst it is not insured. Why then would you gamble on the future of the people you love the most, your family and their dreams of the future? It is then that you realise that the cost life insurance imposes on you, and your family, comes down to something tangible and real.
If you cost life insurance on the amount of premium you pay you must also look at the two basic types of life insurance you have to choose from: term and whole of life. There is a big difference in their costs and this reflects itself in the amount you are able to insure yourself for. Firstly, all life insurance rates are based on two main concepts, interest and mortality. There is a third concept but this is mainly concerned with administrative costs such as paying claims, cost of operating the business and merchandising. The main two concepts that have a real meaning to the insured person are interest and mortality:
- Interest is an amount of money your premium is capable of earning. The company invests part of your premium in a variety of ways such as real estate, mortgages, stocks and bonds. The return they get from these investments goes a long way to reflect the level of premium you have to pay as the longer you pay the premiums means the more the insurance company has to invest and the more interest income they can earn. Similarly the larger the group of policy holders the less the premium.
- Mortality is a word used to describe sharing the risk of dying among a large number of people. Insurance companies employ actuaries to ascertain this risk based on how much money they need to raise to pay the expected number of death claims among their policyholders. They do this by determining the average life expectancy of the various age groups.
Is Low Cost Term Life Insurance the Right Option?
When you purchase life insurance in Australia today there is no other option open to you but to buy term life insurance. Term life insurance's biggest competitor for the last hundred years had been whole of life assurance but whole of life assurance has been discontinued mainly because of superannuation being made compulsory for all employees. Superannuation is mainly set up to provide sufficient funds to retire on but it also carries a term insurance component that provides a lump sum payment to your beneficiaries should you die before you reach retirement age and the fund hadn't had enough time to build up sufficient funds from its investments. Life insurance cost is therefore not the issue it once was.
Although the life insurance cost of term life insurance can be considered to be quite cheap while you're still reasonably young it can become quite expensive in your later years. This can pose a problem if you don’t have any superannuation to fall back on as if you reach retirement age and your term insurance cover has expired it can be quite expensive to renew the policy for another term, even if you are only seeking a small amount to cover your funeral expenses.
None of us can be certain of what our futures hold and that is what makes life insurance such an important part of our lives. We can never be sure if we're going to reach old age in a financially independent state or if we'll be reliant on the pension. This need not be the case however as we can take out personal self funded superannuation to place investment contributions in for our own retirement purposes and use cheap term insurance to protect our assets on the way through. Life insurance cost problems as you age can therefore be averted and you can enjoy life with an improved peace of mind.
Competition Among Providers Can Mean Lower Life Insurance Premiums
Increased competition in the Australian insurance market and advances in medical technology has meant that premiums are actually decreasing. The decision on whether or not to take out life cover should never be based purely on how much it is going to cost the applicant, but also the level of cover that will be provided. That said, people do have restrictions around what they can spend on cover and for those people there are other options to consider.
The best step that anyone looking for life cover can take is to take the time to determine how much cover they actually need and if necessary consult with an insurance adviser to help them find appropriate options. In any case, it is crucial for all applicants to review the benefits and features offered in their policy to ensure the price reflects what is provided.