Things you need to know when purchasing an insurance plan

Essential considerations before locking in to your choice of insurance policy.

When you sit down to consider your personal financial planning you must of course take into account the amount of life insurance you have to protect your family should something totally devastating go wrong to throw all your plans into disarray. An adequate life insurance plan will give your family the cash it needs to become financially independent even though you will not be there yourself to ensure this occurs. Life insurance is therefore a means in which you can ensure your financial plans for the future of your family will continue even after you are gone from the scene.

When purchasing an insurance plan you will have to take into account your own individual circumstances. No two people are exactly the same in this regard therefore such an important subject can't be generalised. However, it is possible to place various types of people into loose categories in order to give you an idea of how you should go about purchasing your own personal plan, such as the following examples show:

  • If you are not married but supporting a family unit. You will need to take into account the amount of debt the family is carrying. You will also have to look into the future and consider what it would cost to raise your family in the manner you would like them raised. You may wish to purchase a home, if you haven't done so already, to ensure there will always be a roof over their heads, food on the table and someone to care for them. This can be achieved by having sufficient life insurance to pay debts, buy a home, and have enough left to invest so that an income stream can be created from the interest earned. A large amount of term insurance would be the way to go in this instance.
  • A single person with no dependants is in a different situation altogether. Many single people however do accumulate debt. You might be starting your own business or bought that expensive car, there is always funeral costs to take into account as well, no matter if you are carefree and single or not. Your insurance plan in this case would be more likely be along the line of a whole life insurance policy which would give you the amount of cover you need at this stage of your life but able to be added to with term insurance at a later date when circumstances change.
  • When married with children you have two spouses to share the cost. The requirements for a married couple with children will be much the same as for a single parent with dependants although in this case there are two people who are responsible for bringing up the family. If one partner were to die the other could take more responsibility with financial help coming from a good insurance plan. You will need to take out life insurance policies on both parents with the aim of the benefits being able to replace either financially. If both parents work you will need to have their income replaced. This can be done with term life insurance. A sufficient amount would be required that could be invested which would return an income stream capable of replacing the contribution of the partner who has died.
  • A stay-at-home parent contributes as much as the breadwinner. A stay-at-home parent is not always recognised for the great contribution he or she makes to the smooth running of the family unit. Much emphasis is made of the monetary contribution made by the breadwinner because it is actual money being brought into the household. If the stay-at-home parent were to die you have to think in monetary terms of how much it would cost to replace either him or her. If the surviving parent wanted to remain in employment you would have to consider the cost involved to hire a nanny, or house-keeper. If the surviving parent would prefer to become, or remain, the stay-at-home parent, the loss of family income from the former bread-winning parent would need to be replaced. Either situation can be solved with the use of term life insurance to be taken out for the period the family would be most vulnerable.
  • The situation changes again when you become an 'empty-nester.' The struggle of raising a family is behind you. All the kids have grown and left home to start their own families. Only you and your spouse are left to wander the empty passages of the family home and look into the empty bedrooms now and again that used to be full of laughter and sometimes tears. The mortgage is either paid for or close to it and if you are not retired from the workforce yet, you soon will be. Your living expenses have decreased considerably. This is where your original whole life insurance policy that you purchased so long ago when single comes to the fore. It will provide you with sufficient funds to pay your funeral costs plus any final debts you might have as well as leave a bit of a legacy to your family. If you hadn't taken out this policy at that time you will find a term insurance funeral cover most expensive, probably on the verge of being prohibitively costly, especially if you are now in your sixties or seventies.

Maurice Thach

An insurance researcher and writer for who loves finding an answer to the question "Am I covered for ________?" Maurice has also completed a Tier 1 Life Insurance and a Tier 2 General Insurance Certification under ASIC's Regulatory Guide 146. This means he can confidently provide general advice for life insurance and non-life insurance products.

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