Do I really need Life Insurance and what is it?
Most Australians adopt a “she’ll be right” attitude when it comes to life insurance. We think we’re invincible! It is one of the reasons why Australia is one of the most under insured developed nations.
BUT if you have any dependents, co-dependents, a mortgage, it should be one of the first areas of your budget for which you need to set aside money.
But what is it and how to purchase it?
What is Life Insurance?
Life insurance is an umbrella term for certain types of insurances.
- Death Cover Insurance (but “life” feels more positive when marketing insurance) – basically a payment made to your beneficiaries on your death
- Income Protection Insurance – payments made in the event you lose your job – you can find out more here
- Trauma Insurance – also called ‘critical illness’ pays a lump sum amount if you suffer a critical illness or serious injury. This includes cancer, heart issues or a stroke. Trauma insurance does not cover mental health conditions (this is likely to be covered under Income Protection Insurance, but check your policy terms closely)
- Total Permanent and Disability Insurance – this pays a lump sum if you become totally and permanently disabled because of illness or injury.
How and where to purchase Insurance?
Before you can decide on a policy type, it helps to know what you’re dealing with. You’ll need to know the difference between direct, advised, and group insurance.
Here’s an explanation of each type, along with the advantages and disadvantages of each.
Direct life insurance
Direct life insurance is cover that you purchase directly from the insurer. It is the cover you will most likely hear about on the television or radio. Thankfully, the government as of January 2020 has now banned those “annoying” unsolicited insurance calls you once got.
The key advantage of direct insurance is that it is usually quick and simple to get covered, as you often don’t have to provide any medical information at the application stage. BE WARNED: this may come when you look to make a claim, so you will need to be as truthful as possible during the application stage.
Direct insurance may or may not be cheaper than retail insurance (explained below) – however, the key disadvantages are that it requires you to do all the legwork and know how much cover you actually need and who is offering the cheapest price and what exclusions there are.
Retail or ‘Advised’ life insurance
Advised life insurance is cover you purchase with the help of a financial adviser. Often, it helps to find an adviser who’s sole experience is in insurance. They’ll know every nook and cranny of each insurer, pricing, any exclusions and in many instances, have a decent understanding of medical terms and doctors within the medical industry come claims time.
In addition, your circumstances may change over time, be it a new heart condition or the fact you have given up smoking for a certain period of time. An adviser will constantly monitor your risks and the premiums (monthly or annual cost of insurance) you are paying.
The application process for retail life insurance will often be different than with direct life insurance, because you’re submitting your application through an adviser rather than directly to the insurer.
A financial adviser can help answer questions throughout the application process – you don’t want to be in a situation of being under-insured or paying too much. They will also help you understand the different types of cover you may need based on your lifestyle expenses, number of dependents you have, and any debt you may need to cover on behalf of your loved ones or yourself in the event you need to claim.
Especially in the event of your death, your adviser can help your beneficiaries if a claim needs to be made, a time that is most traumatic for everyone. Evidence from the regulator, ASIC, has found this is likely to lead to a better outcome.
Retail insurance applications tend to be more thorough. You’ll usually be assessed on any pre-existing medical conditions, it may also mean going for a medical check-up. This will give you peace of mind when it comes to making a claim. In contrast, direct insurance is not medically underwritten, and the claims process will often take longer and be less successful.
Group life insurance
Group life insurance is a policy you typically purchase through an employer or a superannuation fund. Check your super fund if you have a policy and how much it covers – some policies used to automatically opt you in for cover.
As the term group life suggest, it usually covers a group of employees in an organisation and as such, the insurer may provide a group discount. This may be a great option than buying direct – however, there is usually a cap on the amount of cover, so often the amounts are far smaller than if you bought direct or retail life insurance.
Often, one of the major advantages with group life insurance is that you don’t have to go through an underwriting process (ie do a medical exam). However, this isn’t always the case.
The biggest downside of group insurance is that it is as a ‘one-size-fits-all’ policy, so the amount of cover and type of cover may not suit you.
Whilst insurance and how you purchase it, is a personal decision, we believe retail cover has more pros than cons;
If you are thinking about life insurance, we suggest speaking with your super fund or a financial adviser at our sister site www.adviserratings.com.au.