Deciding which life insurance is best for you
Unfortunately there is no quick answer to the question “which life insurance policy should I choose?” Like choosing a mortgage plan to pay off your home, life insurance is a long term investment that requires careful consideration of the buyers financial obligations, any existing cover that is in place and their budget. Individuals looking to take out cover can consult an insurance adviser to help them decide on a suitable policy though it is always worth getting some background knowledge of what is available so that an informed decision can be made.
What types of life insurance are available in Australia?
The Australian Insurance Industry offers four main types of cover to choose from and a number of sub-policies with reduced benefits. This section will give an overview of each of these and the types of buyers that they may be suitable for.
|Type||Benefit||Additional Benefits||Suitable For|
|Life Insurance||Provides a lump sum benefit payment if the policy owner passes away or is diagnosed with a terminal illness and not expect to survive for longer than 12 months.|
|Income Protection||Provides an ongoing benefit payment of up to 75% of ones regular income if they are unable to work for an extended period of time as a result of an illness or injury that they have suffered.|
|Trauma Insurance||Provides policy owner with a lump sum benefit payment in the event that they suffer a major illness such as heart attack, cancer, stroke or paralysis.|
|Total and Permanent Disablement Insurance||Provides a lump-sum or ongoing benefit payment if the insured is made permanently disabled and unable to return to work or unable to return to work to their previous capacity.|
Linking different types of insurance cover
It is worth noting that most insurers will enable applicants to bundle their insurance so that they can take advantage of the different types of cover available. As an example, most policies will allow people to take out trauma insurance within their life cover or take it out as a linked standalone policy.
Benefit of linking policies
The benefit of taking out two separate policies is it may provide more comprehensive protection. It is also worth noting that if a benefit is paid for trauma or tpd that is linked to life cover, the sum-insured for life cover will be reduced by the sum of the benefit paid. This can be avoided by adding a buy back benefit to the policy which will allow the insured to repurchase the reduce sum-insured 12 months after the benefit was paid. This can be exercised for both Trauma and TPD.
Other types of insurance available
|Type||Benefit||Additional Benefits||Suitable For|
|Keyman Insurance||Provides a lump-sum benefit payment to business owners following the loss of a key worker in their business. Benefit may be used to cover hiring and retraining costs and any loss that may be incurred to the business following the worker's death. Keyman insurance can also be taken out as income protection insurance, critical illness or TPD.||Key Person is more a loosely fitted term to describe different types of insurance cover be it life, income, disability or critical illness for key workers so additional benefits can vary greatly. It is more beneficial for business owners to consider the losses that may be covered including;||Keyman insurance is suitable for business owners with workers that the business depends on for their skill, experience and drive. A key worker is essentially a worker whose loss could have a direct financial impact on the business. It may include;|
|Funeral Insurance||Provides a lump sum benefit to cover funeral costs and other immediate expenses that may be incurred following policy owners death.|
|Accidental Death Insurance||Lump sum for death caused by accident only.|
|Accidental Income Cover||Ongoing benefit payment of 75% of the policy owners regular income for accidental injuries. No benefit will be provided for serious illness.|
|Mortgage Insurance||Lump sum benefit to cover mortgage repayments following death of the policy owner.|
Tips to decide which life Insurance is suitable for you
Now that you know what types of cover are available, it is now time to decide which option will give you adequate protection in the future. Here are some questions to help you make this assessment.
Do you already have cover in place?
You may already have life cover or income protection provided by your employer under a group policy. If this is the case, it is worth determining what you are entitled to receive and if it is worth considering a more comprehensive standalone policy of your own.
There may also be a default amount of life insurance that has been provided through your superannuation. Again, it is worth assessing how much you stand to receive under a benefit payment as most policies will not provide an adequate level of cover to keep on top of all financial obligations. Insurance through super may not always have the same comprehensive cover offered from standalone policies and benefit payments to non-dependents can attract tax as high as 16.5%.
Workers compensation, employer or Centrelink benefits?
It is worth assessing what other benefits you may be entitled to from workers compensation or from your employer. In regards to income protection insurance, it is also worth considering how many sick days you have accrued. This may influence your decision on how long a benefit period to take out.
In the event of a claim, other benefits that the policy you are entitled to will be offset to the benefit paid from your insurer. This is to ensure that the injured or sick worker can not receive more than 75% of their regular income (an incentive to ensure the worker returns to work and reduce false claims).
What do you need to cover?
A crucial step in deciding what cover to take out is assessing what would need to be covered in the event of your death, injury or serious illness. This may include;
- Rent and mortgage repayments
- Financial dependents that you support now and would need support into the future
- Daily living expenses i.e. food, petrol, clothing, entertainment, holidays
- Education and childcare fees
- Utility bills
- Outstanding debt i.e. credit card debt, personal debt and any outstanding loans
- Medical costs that may be incurred during illness
- Modifications that may be required at home and workplace due to disablement
- Funeral costs
- Legal fees
- Estate planning costs
- Financial planning
Personal situation considerations
In addition to financial obligations to cover, it is also worth considering aspects of your own situation that may influence the decision to take out cover. This may be include;
- Risks associated with occupation
- Risks associated with pastimes i.e. participation in dangerous sports
- Risks associated with preexisting medical conditions.
Buyers should be aware that cover for high-risk occupation, pastimes or existing medical conditions will often lead to a premium loading from most providers. Some insurers are more willing to work with people bearing certain risks so it is worth comparing different cover options available.Back to top
Which Life Insurance policy is best for you?
Once you have decided what type of cover you wish to apply for, now is the time to choose between the different policies on offer. An insurance consultant can support you in this decision though it is best to get familiar with what aspects of a policy should be considered;
- Sum-insured: What is the minimum and maximum amount of cover that can be applied for? This will be dependent on the insurer and type of cover applied for. As an example, funeral insurance will generally provide up to $30,000 in cover while Life Cover can be around $1, 500, 000. Income protection policies will also have a maximum monthly benefit that can be provided.
- Sum-insured discounts: Some policies will offer premium discounts for large sums insured.
- Policy exclusions: This is perhaps the most critical component of the policy as it will determine what events you will be entitled to a benefit payment for. This is especially important when reviewing medical conditions covered under trauma insurance.
- How benefit is used: While most policies will let policy owners and or their beneficiaries use the benefit payment as they see fit, there may be some restrictions on this to be aware of.
- Waiting period: Policies will generally offer a range of waiting periods on policies for cover to be provided. This can be anywhere from 2 weeks to 2 years.
- Benefits and features: This will vary greatly between insurers. Important to review what benefits are built-in with the policy and those that are only available at an additional cost.
- Payment frequency and discounts: Most policies will offer a range of different periods that payments can be made i.e. fortnightly, monthly or annually. Premium discounts will usually apply for less frequent repayments.
- Definition of Disablement: Definitions of partial disablement and total and permanent disablement will vary greatly between insurers. It is worth reading further into how disablement is treated by insurers here.
- Fees: It is worth reviewing what fees you can expect to pay on the policy each year. This can include an annual policy fee (generally between $50-$70), and stamp duty (can vary between 0%-11% depending on state).
- Discounts: There may be discounts available for premium frequency, policy owner loyalty or for taking out a joint policy.
- Premium patterns: Most policies will provide either stepped or level premium patterns though some providers will also allow for blended premiums.
- Benefit indexation: Insurers will usually increase the sum-insured to account for inflation. It’s worth reviewing how much this is increased by (usually 5%).
- Cancellation of policy: It is worth reviewing policy cancellation conditions and the cooling off period. The cooling off period is the period of time that the policy owner has to opt out of the policy once cover is put in place (generally between 28-32 days)
- Occupation: Most policies will have exclusions in place for certain benefits and features for different occupation classes. There may also be restrictions around how much cover can be taken out.
- Price: It is important to get an understanding of how much you will be paying for your cover over the life of the policy. Buyers should be careful to not be drawn in by the preliminary quote that is provided as it can change quite drastically following medical underwriting and how the policy is structured.
- Cover within superannuation: In addition to self-ownership, you may choose to structure your life insurance plans through a complying super fund.
- Claims process: It is worth learning about the providers process for claiming cover. Most providers will have this information on their website.
As can be seen from the list above, there are many different aspects of a policy to consider when reviewing different plans. It is always worth reading through the Product Disclosure Statement and speaking to your insurance consultant about any components that are not clear before applying.Back to top
Which life insurance company should I choose?
The Australian insurance market is made up of a range of different insurance providers including insurance companies, general insurance companies and friendly societies. Among them there is literally hundreds of different policy options that can be purchased either direct (straight from the insurance provider) or through an insurance consultant.
Should I consider insurance from a direct provider?
Direct insurance is a smart option for people that know what type of cover they are after and are eager to get it in place quickly and avoid a long application process. Cover can be put in place online or over the phone and it is generally only available to low risk applicants that do not require additional medical underwriting.
Some life insurance companies will now provide a suite of direct insurance products in addition to their advice based products.
Tips for choosing between life insurance companies
- Other policies held with provider: Some providers will give premium discounts to applicants that already have other policies in place with them.
- Policies on offer: Obviously the types of policies on offer will play an important role in deciding what insurer to go with.
- Awards received: It is worth reviewing awards that the insurer has received for their different products and also as a company. The Australian and New Zealand Institute of Insurance and Finance and the annual Money Magazine Awards are a good place to start for this.
- Financial strength: It is always best to take out a policy with a company with proven financial strength and a solid reputation within the insurance industry. Life Insurance policies can last for many years and the last thing you need is for your provider to go bankrupt.
- Reviews from current and past policy owners: It is worth reading up on reviews from people that have previously held policies with the company, especially those that have undergone a claim. It is always best to read a range of reviews and not let your opinion be swayed by one spiteful policyholder or claimant.
- Reviews from industry publications: It can be helpful to read through reviews from known industry commentators.
- Credit ratings: All life insurance companies are given a rating for their perceived financial strength issued by an independent credit ratings company. This rating is based on the company's capability to meet claims as they arise, nature and provisions of the policies offered and the protection in place for policyholders in the event of bankruptcy.