When you’re trying to make ends meet the last thing you think about is the future. For most people, insurance is at the bottom of the list when there are so many current commitments such as school fees, utilities, car repairs, house repairs, and the list goes on.
Studies show that almost 95 percent of Australian families are under-insured. Meaning that if anything happened to the main income earner, his or her dependents could lose half their income and will have trouble meeting financial commitments.
How much do you really need?
While people may think life insurance is expensive or an unnecessary expense, it could be the best thing you do for your family. The adage a little bit goes a long way here. The monthly, yearly or quarterly contribution you make to insurance premiums could be a tremendous help to your family in the future. You never know what will happen and it is usually in hindsight that you feel relieved that you have taken the necessary steps.
There are different types of insurance available which you will need more or less of at different stages of your life. The need for most types of insurance usually peaks at age 35 to 45 when most people have the highest commitments and dependents. In other words, they are tied down with a big mortgage and children and all the expenses that come along with it.
In general you will find the following insurance types:
Life insurance – This is classic insurance and is the most common. It leaves a lump sum payment for your beneficiaries should you pass away or are diagnosed with a terminally ill disease.
Trauma insurance - This type of insurance provides a lump sum payment to your beneficiaries without you dying. The payment is given out upon diagnosis of a major life-threatening illness such as organ transplant, open heart surgery, heart attack and cancer.
Total and permanent disability insurance – Often called TPD insurance, this type of insurance payment does not require death to be paid out. It provides a lump sum payment to your beneficiaries in the event that you become permanently disabled and are unable to ever work again.
Income protection – This type of insurance is not given out in a lump sum payment. It is designed to help you meet your commitments if you are temporarily unable to work. Income protection insurance provides you with a monthly payout of up to 75% of your average income.
Insurance according to life stages
Fresh graduate, first job
You’ve recently graduated. You’re in your first job. This is probably the best time to get some life insurance quotes. You are in good health (your ratings will be higher) and you have more income to spare for insurance premiums. When you start young, the premiums are much lower and you might be able to take advantage of these lower rates as you progress through life.
As your income increases, your financial commitments might too. This is when you might be taking on your first mortgage or car loan. Although the expenses are increasing you can still budget for insurance. One way is to take it out of your superannuation which offers lower rates than seeking a plan externally. If you are in a relationship you might want to consider couples insurance and share the costs with your partner.
Families with kids
Household expenses peak at this stage of life but this is usually the time when you need insurance the most. If you are the main income earner of your family, there is an even greater need to protect you family members should anything happen to you.
Mortgage debts are pretty heavy at this point and saving up for your children’s education. You can still fit insurance on top of the daily expenses by planning wisely. For instance, consider how much insurance you really need. Is it to just cover the debts you currently have? Do you want your spouse to continue working? Do you want your children’s education to be completely covered?
How much insurance you take out really depends on the lifestyle you want to leave your family with after you’re gone. Sometimes it’s more prudent to choose a realistic balance if insurance costs are too high. You might also want to review the features and benefits that come with your life insurance policy. Some policies cost a lot more because of certain add-ons, flexibilities or investment plans you may not need at this stage in your life.
Families with grown-up kids
Your children have grown-up and moved out. Your responsibilities have greatly reduced. At this point you may even wonder if you need insurance as your mortgage is almost paid off and your children are financially less dependent. But instead of cancelling your policy, you can consider reducing it so you can pay lower premiums. In this way, your family can still be protected from the remaining debts you have.
You’re in your golden years. You’re almost debt-free (hopefully) and you’re ready to enjoy the fruits of your labour. Stopping work however means you may no longer have as much income coming in every month. Instead of letting your insurance lapse however, you can reduce your policy even more to just cover any remaining financial obligations you may have. Not to mention a little leftover to cover some medical and funeral expenses so you don’t have to pass this burden on to your beneficiaries.
Insurance is affordable
If you are after a rough guide, most people tend to increase their life insurance, TPD and trauma insurance from the age of 20 to 45, as their financial commitments increase. Then as they head for retirement, these insurances taper down slowly. People with income protection insurance tend to increase it over time, just to make sure they can continue getting an income as they age and should anything happen to them.
Insurance coverage is not as expensive as most people think. The trick is to plan wisely at each different life stage. Talk to different agents and compare different plans. There is bound to be a policy that suits your needs.
Note: Michael B. is the freelance author for Australian personal insurance website - www.lifedeal.com.au