Why finding the best moment to take out cover will get you more value for your money.
Taking cover at the right time ensures everything that's important to you is covered. So when is the right time? A Deloitte study from 2015 found several different “best” times to take out life insurance throughout one’s life:
- Having kids
- Buying a house
- Changes financial situations
- Getting married
What’s the benefit of getting cover sooner rather than later?
Here are the key benefits of getting cover at a younger age
1. Lock in a cheaper rate
Two of the main factors which influence life insurance premiums are:
- Your health at the time you took out the policy
- How much cover you have in dollar amounts
At a younger age you can lock in lower premiums as your health is likely to be much better than when you are older.
2. Ability to take out a larger sum insured
As you get older, some insurers will start reducing the maximum amount you can take out in life insurance. For example:
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3. Increase or renew your cover without the need for a medical test
As you go through different life stages your cover needs will typically change and you can raise or lower your level of cover accordingly if your policy has a feature known as “guaranteed future insurability”.
How does it work?
With many life insurance policies you can almost-freely adjust your cover without undergoing any new medical testing until the age of around 50 to 55, provided it has guaranteed future insurability.
By taking out cover when you’re younger and can “score well” on a medical test for lower premiums, you can often renew your cover at the same rate.
When would I need this?
For example, having a second child means you might want to increase your cover to accommodate their education and living expenses. Meanwhile, when your children enter adulthood and move out, you might want to reduce your cover level in order to lower your premiums, because they may no longer need to be protected under your policy.
Note: your premium rate may change based on whether it is a stepped or level premium.
Applying for life cover at a young age vs later.
Bob and Sue had it all planned out. They were getting married at age 30, taking out a mortgage at age 35 and then having children at age 40, when Bob was further in his career and earning more and Sue could then become a stay-at-home mum.
They decided ahead of time that they would only take out a “level premium” life insurance policy at age 40, when the addition of children changed everything and added at least 18 years of additional expenses to their financial situation. They figured that this would be the best time to do it because they’d have a clearer sense of their financial needs and could then find a more suitable level of cover.
Unfortunately, they underestimated both the potential flexibility of life insurance policies and how much money can be saved by getting cover sooner.
When the age of 40 rolled around and they had children right on schedule, it became apparent that they could have saved big on their cover. They needed life insurance, but the premiums were more than twice as high as they were only 5 years ago. This was for two main reasons:
- They were taking out a much larger sum insured than they would have taken 5 or 10 years ago, because they had more expenses.
- Being 40 years old, they were now getting “over the hill” prices instead of “young and fit” prices, which compounded with the sum insured to drive prices way up.
If they had taken out cover at 30
By taking out level premium life insurance cover at age 30 they could have gotten the “young and fit” prices right up until well after age 40, and prevented the compounding effect of “over the hill” premiums and a higher level of cover.
Under the terms of their specific policy, Bob and Sue could also increase cover without further medical testing right up until the age of 60. By this age their children would have grown up and become financially independent, letting Bob and Sue reduce their cover level to keep prices down.
Had they taken out cover at age 30, premiums would have been considerably lower at age 40. Plus, if something happened to Sue or Bob in that 10-year period then they would have had life insurance cover.
Similarly, if either of them had developed diabetes, heart disease or another chronic health condition in that 10-year period it could have driven prices up even further, or left them only able to find policies that excluded cover for that pre-existing condition, meaning their life insurance wouldn’t pay out in the event of a fairly likely cause of death.
What should I look for in a life insurance policy?
When taking out long-term life insurance cover, designed to be held and adjusted over decades, there are a few features in particular you may want to look for.
- Guaranteed insurability
- Premium structure
- Superannuation rollover
1. Guaranteed insurability
This policy feature lets you increase your level of cover, without additional medical underwriting, as your needs change over time. Reasons to look out for this feature include:
- Changing health status. It can be exceptionally important in the event of developing a chronic health issue after taking out the policy.
- Changing lifestyle and needs. It can be essential for keeping costs down as you increase cover, such as when having children, taking out a second mortgage or raising your cover in line with a more affluent lifestyle over time.
2. Premium structure
There are three main types of premium structures: Level, Stepped and Hybrid. Stepped and level are two of the most common life insurance premium structures, while hybrid premiums present a less common third option.
- Level premiums will not directly increase based on the insured person’s age, but will still rise when you increase your level of cover and based on inflation. Depending on the policy, level premiums may be largely determined by how old you were when you took out the policy, with younger being cheaper.
- Stepped premiums are directly based on your age or the length of time you’ve held the policy. Stepped premiums are typically cheaper at a younger age but can be dramatically higher in later years. Stepped premium policies can have options like premium freezes to help manage the costs, but your sum insured with these will typically diminish while premiums are frozen.
- Hybrid premiums can be harder to find and are not available from all insurers. These start off as stepped premiums and then turn into level premiums in later years. It offers a combination of the benefits, but depending on the insurer may come with restrictions, such as being unavailable before the age of 35.
The consistency over time means you may want to consider a level premium structure when taking out a long-term life insurance policy at a younger age.
3. Superannuation rollover
Superannuation life insurance rollover can be a useful option, which can help make the right cover more practical and affordable. This can let you get the dual benefits of being able to find life cover that suits your needs and can be taken out early, and being able to pay premiums through superannuation contributions.
It’s important to make sure this doesn’t erode your retirement savings unduly, but can be a useful way to essentially sacrifice super contributions instead of needing to pay out of pocket, which can be a useful way to help maintain the right level of cover over time.
The different types of cover
Different types of cover can be bundled with life insurance, including income protection, TPD and trauma insurance. Depending on your situation and life stage, each of these cover types may be more or less useful than others.
Having these options, and being able to adjust them over time, can help make sure your policy remains effective over the years as your risks change.
- Trauma insurance: Pays out a lump sum in the event of specific health issues. If you have a family history of certain health issues, are otherwise at high risk of specific conditions or simply want more protection, it might be worth considering.
- TPD insurance: Can pay a lump sum in the event of a disability which leaves you unable to work. As a lump sum payout, it can be useful for paying off debts or obligations like a mortgage, in the event of losing your income.
- Income protection: Can pay ongoing benefits for up to a set period of time, in the event of illness or injury leaving you unable to work. Some policies may also pay out in the event of redundancy or other involuntary unemployment.
What type of cover is right for me?
It can be a good idea to consider each of these on its own merits when taking out a policy, as well as checking whether you’re able to add, remove or otherwise adjust cover types later on as your needs change, and whether the guaranteed insurability condition of your policy extends to adding new cover types, or adjusting the sum insured for these.
Beware when combining cover
When you add these cover types to a life insurance policy, in contrast to taking them out as standalone policies, they will often have their own separate sum insured, but will “share the same pool” of life insurance cover. For example, your policy might have $1 million of total cover and $500,000 of TPD (total and permanent disablement) cover. In the event of a permanent disability claim you might then get paid $500,000 and have $500,000 of life insurance remaining.
Jane adjusts her insurance over time.
Jane took out an exceptionally flexible life insurance policy when she was young, which let her adjust cover types as her needs changed. Over the years that she held the policy she:
- Added trauma cover. After one of her parents passed away from heart disease, as had her grandparents, it became apparent that she was at hereditary risk. Screenings confirmed it, and she took out trauma insurance that could pay out a lump sum in the event of cardiac arrest, heart surgery or other survivable heart events.
- Added TPD cover after taking out a mortgage. Although she didn’t have any beneficiaries or anyone depending on her income, and wasn’t planning to, Jane took out a life insurance policy ahead of time just in case. When she took out a mortgage she added TPD cover, with a high enough sum insured to cover the full mortgage payment, to her policy. Now, in the event of a disabling injury that leaves her unable to work, she would be able to pay off the full mortgage so she’d have a home and wouldn’t need to worry about renting while disabled. Fortunately she never needed it and cancelled her TPD cover after retiring.
- Temporarily added income protection insurance. For several years Jane was self-employed and had no sick leave or potential workers compensation in the event of injury or illness leaving her unable to work. During this time she added income protection insurance, with a short waiting period, to her policy. After she changed jobs and accrued sick leave she extended the waiting period to reduce premiums. In later years when she had enough assets to retire on in the event of injury, she cancelled this cover element to keep premiums down. With the help of a financial adviser, she also adjusted her income protection cover for tax benefits at various stages.
Working out how much cover you need
The sum insured generally refers to the total amount of cover in your life insurance policy. In other words, the total amount that can get paid out in the event of death. Other types of cover, such as TPD insurance, might have their own sum insured that’s different to your life sum insured. This can make it easier to adjust your cover in a modular way as your needs change over time.
Understand the financial needs of you and your family
Your life sum insured should generally be a reflection of your financial needs. If it’s too high then you’re paying too much for cover that you don’t need, and if it’s too low then you’re underinsured.
Reassess after significant life changes
It can be a good idea to re-evaluate after life changes, and on a semi-regular basis to see how things have changed. Some factors will drive your needs upwards, such as having another child, while others will let you reduce your cover to lower premiums, such as paying off a mortgage or simply having your children get older.
Factors to consider
Life insurance calculators can help you add it all up, including factors such as:
- Debts. As ongoing expenses, it’s preferable to find a sum insured that lets your beneficiaries pay off all debts, such as credit cards, home loans and other forms of debt. As your debt reduces over time, you may be able to reduce your sum insured accordingly.
- Ongoing living expenses. The living expenses for which your income is responsible. This can include utilities, general household bills, clothing, food and everything else.
- Children’s costs and school fees. It can help simplify things to calculate your children’s costs separately, such as school fees and clothing expenses, because you can roughly predict how many more years of expenses you need to be able to provide for. As they get older, the costs you might need to set aside for them decrease and you may be able to reduce premiums by dropping your sum insured accordingly.
- Assets, superannuation and other offsets. As your assets, including superannuation, grow you may be able to reduce your sum insured to compensate. Essentially, these assets can be passed onto your beneficiaries, or used by you in the event of a life-changing event like disability, to help cover costs.
As you can see, there are likely to be both sum insured ups and downs over the years. By taking out a policy sooner for lower premiums you may be able to more easily adjust your cover as needed.
Do I already have cover? How to check for existing life insurance policies
There’s a reasonable chance that you already have a life insurance policy through superannuation or you employer. However, the chances of this being a perfect fit for your needs are slimmer. This is because superannuation policies are generally sold in bulk to super funds as “one size fits all” type cover.
Checking for existing cover is relatively quick and easy, but assessing its suitability can be trickier. The flexibility, features, options and sum insured may not be suitable for long-term cover. After all, it was likely purchased in bulk by a corporate body or super fund group, and not you.
In the long term, it may be wise to speak to an adviser
Picking up the right policy before the age of about 35 or upon key life events, whichever comes sooner, is often the ideal time to do it. Finding the right policy with the right features can be an important part of this, as well as finding a policy that can travel with you over the years and keep meeting your needs as circumstances change.