Know the costly pitfalls of not having life insurance in place
The thought of what would happen to your family in the event of your death is never a pleasant one to have. The grief of your loss coupled with the impact on their way of life into the future can be confronting and difficult to discuss. This can lead many to neglect taking out cover and may be a contributing factor to many Australian families being unprotected. As one of the most under insured developed nations in the world, Australians need to be aware of the pitfalls of not having adequate life cover in place.
This article will look at some of the main causes of underinsurance in Australia and the importance of having cover in place.
Underinsurance of Australian families
While life cover through superannuation has help bridge this underinsurance gap, people need to be aware that this is only a default level of cover and to assess if the cover their super is enough to provide financial security if they were to pass away. A 2015 report from Rice Warner showed that:
- Typical default cover for young families is approximately 30% of what they actually require
- Typical default cover for those with no dependents is 60% of what they actually require
Some possible reasons for this
- Too expensive: Many feel that they simply can't afford comprehensive life cover with their current budget.
- There are hundreds of different policy options available in Australia. Taking the time to assess your situation and what features are actually necessary on your policy can save you hundreds. There are many basic types of cover that can provide the right protection without blowing your budget.
- Don't need it: Many people feel that it is not relevant for their situation i.e. they do not have kids.
- Even if you do not have any financial dependents there still may be some expenses to be covered in the event of your death i.e. outstanding debt and funeral costs.
- Unlikely to actually be paid: People often feel that it is unlikely that they will actually receive a benefit payment in the event of a claim.
- There is no reason for a policyholders claim to not be paid if they are within the terms and conditions of their policy. Taking the time to read the policy disclosure statement and have a clear understanding of what events are covered can help avoid any surprises in the event of a claim. Whats more, life insurance companies depend on the reputation generated by customers in order to survive. AMP reportedly paid more than $887.6 million in claims across Trauma, Life, TPD and Income Protection in 2014.
- Lack of awareness: Finally, many Australians are unaware of the pitfalls of not having cover in place. A great number of people currently rely on what is held in their super and their savings. Many could also feel that they will receive government benefits to help them through.
- People need to take the time to actually sit down and work out what they stand to receive in the event of their death and determine the gap between what needs to be covered. The impacts of the loss of a loved one or their ability to work due to serious illness or injury can leave their dependents in an extremely compromising position.
What are the costs of not having cover in place?
The loss of a families main breadwinner can have a significant impact on the surviving families life moving forward. Ongoing mortgage and rent repayments, credit card debt, education fees and everyday groceries all combine to make up a quite shocking figure. Even if you are a stay at home parent performing ongoing home duties and not the main breadwinner of the family, your loss may require your remaining spouse to pay for the services of a housekeeper to provide care for your children.
Common costs to cover
- Mortgage, credit card and other personal debt
- Medical care if diagnosed with a terminal illness
- Funeral expenses
- Education expenses
People without financial dependents in place can still leave considerable financial debt to be covered by immediate friends and family. This may include;
- Funeral expenses
- Mortgage debt, credit card debt, other debt remaining on personal loans
- HECS (university) debt owing on studies completed.
TPD and Trauma cover may be more suitable to people in this situation. These policies will offer protection if they are forced to take time out of work due to serious illness or injury.
Other types of cover to consider
In addition to life cover, there are other forms of insurance to consider to ensure the right level of protection is in place. These types of "living insurance" can offer support if the policyholder is forced to take time out of work after suffering certain events.
- Provides an ongoing monthly benefit of 75% of the policyholders regular income if they are forced to take time out of work due to serious illness or injury
- Additional benefits can provide support to cover rehabilitation expenses that may be incurred as the insured recovers.
- Additional benefits can provide support to cover expenses of professional nursing care if required.
- Provides a lump sum payment to cover costs incurred if the policyholder is to suffer a trauma condition as specified by the provider. This may include stroke, cancer or open heart surgery. These conditions will vary from provider to provider.
- Trauma cover can often be bundled into the policyholders life cover.
- Provides a lump sum benefit if policyholder is forced out of work due to disablement.
- Definitions of "disablement" varies greatly between providers. Essential for applicants to review when a payment is provided.
Steps to find suitable cover for your situation
One major determent of people taking out cover is the price. Many feel they simply do not have enough in their budget to keep on top of ongoing premium payments. Here are some tips to make your cover more affordable.
- Research: Take the time to research the different options available. There are hundreds of different products on the market offering different levels of cover at different prices. Find cover with features and benefits relevant to your situation and ensure the premium payments reflect what is provided.
- Consolidate life cover in super: You may already have some life cover held in different super plans. Consolidating this cover into one fund can help you save a considerable amount in fees.
- Joint life cover options: Some providers will offer joint-policy discounts if you are looking to take out cover for your spouse.
- Speak with an insurance consultant: An insurance consultant can compare hundreds of different policy options on the market for you and help you find premium discounts.