Arranging life insurance is a little more involved than arranging car insurance - however, it is a single-time activity that can have a lot of impact on your family's future health and happiness. There are a few simple steps to getting your life insurance right - calculate your benefit amount, get
life insurance quotes, look at the PDS and insurance contract and select your insurer ... and then simply pay your premium! However, there are some common assumptions that people make that can result in a far from ideal result ... today we check out 6 more of those common mistakes with life insurance policies.
1. Not insuring or undervaluing a non-working spouse
Many people assume there is no point insuring the life of someone who doesn't contribute financially to the household ... forgetting that non-working spouses actually contribute a great deal! Life insurance for a non-working spouse should cover childcare bills, the cost of hired household help, take away meals, gardening etc. If it doesn't, the surviving partner will have stress levels through the roof while grieving and will eventually need to cut back their working hours to better cope.
2. Glossing over the question of stepped or level premiums
Many people choose stepped premiums for their life insurance, because level premiums are far too expensive in the early years while you still have children and a mortgage. However, you need to remember that your life insurance will eventually become a sizeable bill, just at the time when you've retired and have little money, but are closest to collecting the benefit.
3. 'Satisficing' with your life insurance policy
Some decisions in life work best for 'satisficers' - those who go with the first available decent option. However, life insurance should be a lifetime commitment! It's worth spending the time to review a wide selection of companies, not just the first two.
4. Allowing 'sticker shock' to stop you getting life insurance
Yes, life insurance is a significant bill each year; you can't quite cover it by giving up one weekly cup of coffee. However, life insurance has immense value to your family ... and the best things in life certainly aren’t free!
5. Not completing the application yourself
Many families have one partner that is the 'paperwork partner', responsible for filling out forms and that sort of official business. However, life insurance questionnaires get personal - very personal! Given the gravity of the consequences if somebody else fills out your form and it isn’t quite right, it is essential that you be highly involved in filling out your own application. This is important because you need to satisfy the life insurance company’s ‘Duty of Disclosure’ when completing the application for a life insurance policy.
6. Contributing to life insurance at the expense of superannuation
These two financial products are equally important, but very much separate contributions to your and your family's lifestyle in the future. There are different tax advantages with each, and it is smart to devise an investment strategy that allows you to maximize your contributions to both. Doing this rather than trading off between life insurance or superannuation will generally create the best outcome for your lifestyle.
Wednesday, November 10, 2010
Insure or Save - Can Smart Investment Make Your Life Insurance Redundant?
When you start investigating life insurance you'll often come across opinions that lean towards the idea that you don't need to pay money to a big (evil) corporation to get something that you can do for yourself for free - save money. The idea is that smart saving and investment can replace life insurance. So, is this true? Today we take a neutral look at the things you need to consider, and how the numbers might stack up.
If you save the amount of your life insurance premiums, how much will you have?
If you're a male, a recent survey of life insurance premiums for professional male non-smokers revealed the average premium to be about $488 per year, and around $365 per year for female professional non-smokers.
Given that low-risk investments like bank term deposits return about 6% per year, in your first year of saving your premiums a male 30-year old would have $517 saved, and a female would have $386 ... compared to purchasing life insurance, which would give you 12 months of complete peace of mind and the certainty of a $750,000 payout to your family at the time of claim.
But most life insurance premiums go up as you age!
All stepped term life insurance premiums go up as you age. The same survey revealed that at age 40, male non-smokers would be paying $575 per year and females would be paying $464 per year. Saving premiums instead of buying insurance would give males around $7000, and females around $5000. Still, this doesn’t quite compare to the $750,000 of cover.
Don't premiums go up far more after age 50?
Yes, average premiums for 50-year old professional male non-smokers are around $1419, and around $1069 for females. At age 60 this has increased to $5062 for males and $3132 for females.
However, these figures are to keep the same level of cover (indexed to the CPI) that these males and females had at age 30 ... when they were far more likely to have dependent children and very long mortgages. It is far more common to reduce your level of cover as you age to keep premiums manageable. In this way, it is possible to keep your life insurance for the whole of your life ... and still have a substantial payout at the end of it!
While the theory of simply saving your own cash for a rainy day rather than spending money on insurance sounds tempting, the numbers simply don’t add up. Saving the same amount of money as your life insurance will eventually pay out would have a massive impact on your lifestyle ... and doesn't provide you the peace of mind when you really need it.
If you save the amount of your life insurance premiums, how much will you have?
If you're a male, a recent survey of life insurance premiums for professional male non-smokers revealed the average premium to be about $488 per year, and around $365 per year for female professional non-smokers.
Given that low-risk investments like bank term deposits return about 6% per year, in your first year of saving your premiums a male 30-year old would have $517 saved, and a female would have $386 ... compared to purchasing life insurance, which would give you 12 months of complete peace of mind and the certainty of a $750,000 payout to your family at the time of claim.
But most life insurance premiums go up as you age!
All stepped term life insurance premiums go up as you age. The same survey revealed that at age 40, male non-smokers would be paying $575 per year and females would be paying $464 per year. Saving premiums instead of buying insurance would give males around $7000, and females around $5000. Still, this doesn’t quite compare to the $750,000 of cover.
Don't premiums go up far more after age 50?
Yes, average premiums for 50-year old professional male non-smokers are around $1419, and around $1069 for females. At age 60 this has increased to $5062 for males and $3132 for females.
However, these figures are to keep the same level of cover (indexed to the CPI) that these males and females had at age 30 ... when they were far more likely to have dependent children and very long mortgages. It is far more common to reduce your level of cover as you age to keep premiums manageable. In this way, it is possible to keep your life insurance for the whole of your life ... and still have a substantial payout at the end of it!
While the theory of simply saving your own cash for a rainy day rather than spending money on insurance sounds tempting, the numbers simply don’t add up. Saving the same amount of money as your life insurance will eventually pay out would have a massive impact on your lifestyle ... and doesn't provide you the peace of mind when you really need it.
Calculating Life Insurance Benefits: Will the 'Needs' Approach Be Good Enough For You?
Most life insurance policies have benefit figures that seem absolutely, ridiculously overblown to many of us! Our line of thinking runs something like: "Why would my family need a million dollars, just because I died?". Unfortunately, most of us grossly underestimate our contributions to the family. If you're currently the sole breadwinner in the family with several dependants, you'll need to put a bit of calculation time into your life insurance benefit amount. Today we check out two alternative methods for doing this: the 'Needs Approach' and the 'Replacement Income Approach', as well as the benefits and drawbacks of each.
The Needs Approach
You can use the Needs Approach to calculate the level of life insurance benefit that your family will 'need' after you die. Using this approach, you would need to add the single-instance expenses of:
• Funeral and burial expenses
• Unpaid medical bills
• Payment of outstanding debts, including mortgages, credit cards and personal loans
Then include ongoing expenses such as the following, for the period that your family would absolutely need the income support:
• Food
• Housing (Will you pay out your mortgage, or would your family move house anyway?)
• Transport
• Schooling
• Utilities
• Child support costs
• Provision for Family Income
Using the Needs Approach to calculate your necessary life insurance benefit can be quite a burdensome task if you don't already have good financial records. If you choose to use it, don't forget to factor inflation into the yearly figure.
The Basic Income Approach
This method of calculating your life insurance benefit is far simpler. You simply take your current income and multiply it by ten. This figure is a general rule of thumb that can be used to estimate your life insurance needs.
There are other more complicated ways of calculating your life insurance needs. One such way needs you to multiply your income by the number of years that your family would need its support (usually until your youngest child turns 18), account for inflation, subtract any governmental support, and factor in superannuation contribution amounts into future cash-flows. However if you intend on using this more complicated method you may be better off speaking to a financial adviser who can accurately calculate your needs.
The Needs Approach takes more time to calculate, but gives you an accurate bottom-end estimate of what your family could survive on without the benefit of your income. The Basic Income Approach to calculating your life insurance benefit gives you a rules of thumb to estimate your family's needs - but may create higher life insurance benefits, and therefore premiums.
These are both good starting points in calculating your levels of cover, but if you would like a full recommendation talk to a financial adviser who will help you with a detailed calculation.
The Needs Approach
You can use the Needs Approach to calculate the level of life insurance benefit that your family will 'need' after you die. Using this approach, you would need to add the single-instance expenses of:
• Funeral and burial expenses
• Unpaid medical bills
• Payment of outstanding debts, including mortgages, credit cards and personal loans
Then include ongoing expenses such as the following, for the period that your family would absolutely need the income support:
• Food
• Housing (Will you pay out your mortgage, or would your family move house anyway?)
• Transport
• Schooling
• Utilities
• Child support costs
• Provision for Family Income
Using the Needs Approach to calculate your necessary life insurance benefit can be quite a burdensome task if you don't already have good financial records. If you choose to use it, don't forget to factor inflation into the yearly figure.
The Basic Income Approach
This method of calculating your life insurance benefit is far simpler. You simply take your current income and multiply it by ten. This figure is a general rule of thumb that can be used to estimate your life insurance needs.
There are other more complicated ways of calculating your life insurance needs. One such way needs you to multiply your income by the number of years that your family would need its support (usually until your youngest child turns 18), account for inflation, subtract any governmental support, and factor in superannuation contribution amounts into future cash-flows. However if you intend on using this more complicated method you may be better off speaking to a financial adviser who can accurately calculate your needs.
The Needs Approach takes more time to calculate, but gives you an accurate bottom-end estimate of what your family could survive on without the benefit of your income. The Basic Income Approach to calculating your life insurance benefit gives you a rules of thumb to estimate your family's needs - but may create higher life insurance benefits, and therefore premiums.
These are both good starting points in calculating your levels of cover, but if you would like a full recommendation talk to a financial adviser who will help you with a detailed calculation.
9 Easy Ways to Save on Life Insurance
As far as peace of mind goes with regard to your family's well being, there's no sounder investment than life insurance. If you've recently got some life insurance quotes and felt your heart skip a beat, though, don’t resign yourself to living without it! For most people, life insurance is actually very affordable. Today we check out the 9 easiest ways to save on your life insurance.
1. Get different quotes
Different life insurance companies target different demographics; one may offer excellent rates for manual laborers, one may target their services towards seniors, etc. One life insurance quote isn't necessarily 'the price' you'll pay.
2. Bundle your insurance
If you have income protection, trauma or funeral insurance policies elsewhere, find out if you’d be eligible for a discount by bundling policies with the same insurer. Alternatively, you could also look for a life insurance policy that might incorporate all of these benefits.
3. Choose stepped rather than level premiums
Stepped life insurance premiums gradually increase each year as you grow older. This increase reflects the higher incidence of death associated with older age. Despite the slow increase in premiums, this type of structure may suit someone planning to hold their policy for a short period of time.
4. Or, choose level rather than stepped premiums!
Level life insurance premiums are generally cheaper if you plan to hold the policy for a long period of time. They are more expensive at the start, but you will always know how much your premiums will be.
5. Stop smoking
Quit smoking for 12 months, and you can see a drop in premiums of around 30-60%.
6. Lose weight
Being overweight or obese is recognised as a major risk factor for many health conditions. Get yourself within a healthy BMI range, and keep it off for a certain amount of time, usually 12-24 months, and then ask for a new medical examination with your life insurance company.
7. Give more information
Insurance that doesn't ask for background information is like a loan that doesn't ask for your financial history ... anybody can get it, but it is usually very expensive. Don’t avoid policies that require a lot of information; they are generally cheaper.
8. Don't overestimate your needs
A million dollar death benefit sounds lovely. However, if your family won't need this amount of cash when you die, the premiums simply take away from disposable income you could be using to enjoy your time with them!
9. Buy early
People who buy a life insurance policy early in their life, when they are generally healthy, will have a greater choice of life insurance companies and more potential to save on premiums. Additionally, if you choose a company with a guaranteed renewable policy offering, even if you do get a serious illness or injury, they won’t be able to cancel or put an increase on your premiums.
1. Get different quotes
Different life insurance companies target different demographics; one may offer excellent rates for manual laborers, one may target their services towards seniors, etc. One life insurance quote isn't necessarily 'the price' you'll pay.
2. Bundle your insurance
If you have income protection, trauma or funeral insurance policies elsewhere, find out if you’d be eligible for a discount by bundling policies with the same insurer. Alternatively, you could also look for a life insurance policy that might incorporate all of these benefits.
3. Choose stepped rather than level premiums
Stepped life insurance premiums gradually increase each year as you grow older. This increase reflects the higher incidence of death associated with older age. Despite the slow increase in premiums, this type of structure may suit someone planning to hold their policy for a short period of time.
4. Or, choose level rather than stepped premiums!
Level life insurance premiums are generally cheaper if you plan to hold the policy for a long period of time. They are more expensive at the start, but you will always know how much your premiums will be.
5. Stop smoking
Quit smoking for 12 months, and you can see a drop in premiums of around 30-60%.
6. Lose weight
Being overweight or obese is recognised as a major risk factor for many health conditions. Get yourself within a healthy BMI range, and keep it off for a certain amount of time, usually 12-24 months, and then ask for a new medical examination with your life insurance company.
7. Give more information
Insurance that doesn't ask for background information is like a loan that doesn't ask for your financial history ... anybody can get it, but it is usually very expensive. Don’t avoid policies that require a lot of information; they are generally cheaper.
8. Don't overestimate your needs
A million dollar death benefit sounds lovely. However, if your family won't need this amount of cash when you die, the premiums simply take away from disposable income you could be using to enjoy your time with them!
9. Buy early
People who buy a life insurance policy early in their life, when they are generally healthy, will have a greater choice of life insurance companies and more potential to save on premiums. Additionally, if you choose a company with a guaranteed renewable policy offering, even if you do get a serious illness or injury, they won’t be able to cancel or put an increase on your premiums.
5 Deadly Mistakes With Life Insurance
With the removal of 'whole life' insurance policies from the Australian market some time ago, life insurance has been simpler than ever. The remaining option, term life insurance, works in exactly the same way as any other insurance product. You pay a premium, the insurance company gives you a list of covered events and if one of them happens, you can claim the listed amount. This also applies to trauma insurance and TPD insurance (total and permanent disability insurance). However, new research has shown a startling lack of understanding with regards to life insurance Australia wide. Today we reveal 5 common and deadly misconceptions about life insurance.
1. Believing that you have 'social life insurance' available
Australia is very lucky to have socialized healthcare and a good system to support those that are unemployed and disabled. However, many Australians believe the Federal Government is required to financially assist families in the event of one member's premature death.
If you do not have Life Insurance cover and you become unemployed due to grief from the death of a family member you may be entitled to unemployment benefits (currently around $450 per fortnight at full rates)
2. Thinking that life insurance offers a lump sum payout if you live past retirement age.
This dangerous assumption that your Term life insurance will pay you a lump sum in retirement could lead to people failing to put enough money into their super, choosing an incorrect premium structure for their life insurance, or managing assets and debt poorly.
3. Not trusting life insurance companies to pay out
Life insurance claim disputes are often high profile affairs. The claims that are paid quickly and in full are less newsworthy ... and so many people believe that life insurance companies will try to use loopholes to get out of paying a claim. In fact, life insurance companies are required by law to pay out as long as you have met your obligations, and billions of dollars are paid out by them every year.
4. Overestimating the cost of life insurance
Life insurance is not a large expense, year by year. Policies available through superannuation are especially cheap, and even private cover costs less than car insurance for most people. Don't assume you can’t afford it ... the risk to your finances isn't worth it.
5. Thinking that Worker's Compensation covers incidents that occur at home
Many Australians believe that the government is required to pay a replacement income to people that suffer an injury or illness ... even if it isn’t incurred at work. Unfortunately, Worker's Compensation only protects you from work place induced injuries and illnesses, You would be able to apply for unemployment benefits (about $450 per fortnight) if you were eligible upon the loss employment.
There is plenty of free advice available on your life insurance options - if you've never considered getting insurance, it is well worth talking to an expert. You owe it to yourself to make an informed decision, rather than an assumption.
1. Believing that you have 'social life insurance' available
Australia is very lucky to have socialized healthcare and a good system to support those that are unemployed and disabled. However, many Australians believe the Federal Government is required to financially assist families in the event of one member's premature death.
If you do not have Life Insurance cover and you become unemployed due to grief from the death of a family member you may be entitled to unemployment benefits (currently around $450 per fortnight at full rates)
2. Thinking that life insurance offers a lump sum payout if you live past retirement age.
This dangerous assumption that your Term life insurance will pay you a lump sum in retirement could lead to people failing to put enough money into their super, choosing an incorrect premium structure for their life insurance, or managing assets and debt poorly.
3. Not trusting life insurance companies to pay out
Life insurance claim disputes are often high profile affairs. The claims that are paid quickly and in full are less newsworthy ... and so many people believe that life insurance companies will try to use loopholes to get out of paying a claim. In fact, life insurance companies are required by law to pay out as long as you have met your obligations, and billions of dollars are paid out by them every year.
4. Overestimating the cost of life insurance
Life insurance is not a large expense, year by year. Policies available through superannuation are especially cheap, and even private cover costs less than car insurance for most people. Don't assume you can’t afford it ... the risk to your finances isn't worth it.
5. Thinking that Worker's Compensation covers incidents that occur at home
Many Australians believe that the government is required to pay a replacement income to people that suffer an injury or illness ... even if it isn’t incurred at work. Unfortunately, Worker's Compensation only protects you from work place induced injuries and illnesses, You would be able to apply for unemployment benefits (about $450 per fortnight) if you were eligible upon the loss employment.
There is plenty of free advice available on your life insurance options - if you've never considered getting insurance, it is well worth talking to an expert. You owe it to yourself to make an informed decision, rather than an assumption.
4 Important Issues in Renewing Your Life Insurance Policy
After all the heavy decisions and intricate calculations that went into taking out a life insurance policy, renewing one seems like the most natural thing in the world! However, there are still some important issues that can come up around renewal time. Here we look at 4 of those issues, and what you need to know about them.
Did you receive a renewal notice?
If your life insurance company doesn’t send you a renewal notice, ensure you contact them to confirm all is still okay.
Did you pay your renewal on time?
If you don't pay your renewal on time, some companies will require that you be re-assessed for a new policy. Therefore make sure you pay your premiums on the due date.
Has your situation changed since you took out the policy?
Policies in Australia are generally guaranteed renewable , therefore you will not need to inform your life company if there are any changes in your health, if this is not the case make sure you notify your life company of any changes in your health.
Do you need more or less life insurance?
Have you recently taken out a mortgage, upgraded your home, had another child, or has your spouse lost their job or suffered a major health event? In any of these cases, renewal time is a good time to ask about increasing the value of your policy.
On the other hand, if you have recently sold a property, gone back to renting, had a child move out of home, or your spouse has gotten a new job or a promotion, you could decrease your life insurance quotes to reflect this.
Did you receive a renewal notice?
If your life insurance company doesn’t send you a renewal notice, ensure you contact them to confirm all is still okay.
Did you pay your renewal on time?
If you don't pay your renewal on time, some companies will require that you be re-assessed for a new policy. Therefore make sure you pay your premiums on the due date.
Has your situation changed since you took out the policy?
Policies in Australia are generally guaranteed renewable , therefore you will not need to inform your life company if there are any changes in your health, if this is not the case make sure you notify your life company of any changes in your health.
Do you need more or less life insurance?
Have you recently taken out a mortgage, upgraded your home, had another child, or has your spouse lost their job or suffered a major health event? In any of these cases, renewal time is a good time to ask about increasing the value of your policy.
On the other hand, if you have recently sold a property, gone back to renting, had a child move out of home, or your spouse has gotten a new job or a promotion, you could decrease your life insurance quotes to reflect this.
Will Your Life Insurance Be a Waste of Money?
Opinions, from both experts and customers, are pretty strongly divided as to whether life insurance is a waste of money. Some people say it is invaluable, while others tell you that they have never spent their cash on anything more useless. In fact, life insurance can be an invaluable insurance option for everybody that buys it. Just follow these simple rules to ensure that your life insurance won't be a waste of money!
Keep up your premiums
If you take out a life insurance policy and then let it lapse, it is certain to be a waste of money! Every life insurance policy will pay out eventually ... as long as you keep paying the premiums and your policy is in force when you pass away.
Don't over-insure, don't underinsure
If you have either too much, or too little life insurance to meet your needs then your policy may end up feeling like it was poor value. A too-large policy has premiums that are a burden; a too-small policy feels like you had a large extra bill every year for no benefit.
Shop around
There will always be a massive variance in life insurance premiums, even for the same person, from different insurers. Choose the life insurance company that suits you best to avoid feeling like you have wasted money!
Know what the insurance will pay for
No matter your situation life insurance should still be a consideration, even if it is of a lesser priority at this stage in your life.
Keep up your premiums
If you take out a life insurance policy and then let it lapse, it is certain to be a waste of money! Every life insurance policy will pay out eventually ... as long as you keep paying the premiums and your policy is in force when you pass away.
Don't over-insure, don't underinsure
If you have either too much, or too little life insurance to meet your needs then your policy may end up feeling like it was poor value. A too-large policy has premiums that are a burden; a too-small policy feels like you had a large extra bill every year for no benefit.
Shop around
There will always be a massive variance in life insurance premiums, even for the same person, from different insurers. Choose the life insurance company that suits you best to avoid feeling like you have wasted money!
Know what the insurance will pay for
No matter your situation life insurance should still be a consideration, even if it is of a lesser priority at this stage in your life.
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