Term Life Insurance
The main type of life insurance is term life, which provides a cash lump sum in the event of your death. It is probably the most economical form of life insurance.
The insurer offering a term life policy may require a medical examination and sometimes an AIDS test. Term life insurance is renewed annually, with premiums generally increasing as you age.
How much insurance do you need? That's the million-dollar question. An insurer or insurance broker will sit down with you and consider your individual circumstances, such as your family's annual expenses and the age of your children. One rough rule of thumb is that you need five to 10 times your annual salary.
The cover you require largely determines the premium you pay, along with the insurer's assessment of your life expectancy, medical history, gender and risk factors such as whether you smoke.
A woman generally pays less than a man and a non-smoker less than a smoker.
Term life insurance is not tax-deductible, but any death benefit is paid out free of tax.
Make sure your term life policy is 'guaranteed renewable' – that is, renewable regardless of your current state of health. If it isn't, you might find the insurer rejects your renewal if your health deteriorates, and you might be unable to obtain insurance elsewhere.
Most policies will also pay out a lump sum on diagnosis of a terminal illness when your life expectancy is less than 12 months. If the payout is made and you miraculously recover, the money doesn't have to be returned.
Most people have some form of life insurance cover included with membership of their superannuation fund. On the positive side, it can be a cost-effective way of buying insurance. But insurance attached to super potentially has drawbacks as well.
If you leave the fund – perhaps because you are changing jobs because your health has deteriorated –you might then be declined term insurance elsewhere. It may pay to also have separate, additional insurance elsewhere.
Another issue is the right of the fund's trustees to overrule your nomination of beneficiary. Also, tax is payable on a lump sum that goes to a beneficiary who is not a dependant – not the situation when life cover is with an insurance company.
Whole of life (endowment)
Whole-of-life or endowment policies have declined in popularity. These policies have an investment component but most advisers would say you're better off taking out a cheaper term life policy and investing the money you save elsewhere yourself.
The premiums you pay are determined by your age when you take out the policy. Basically you pay the same premium either until you die or until the policy matures – usually at age 60 or 65.
If you die before you reach this age, the policy pays out an agreed amount. If you're still alive when the policy matures, you receive a lump sum from the investment portion.
Disappointing returns are one reason such policies declined in popularity.
In working out how much cover you need, consider:
- Costs at death, such as funeral expenses
- One-off expenses, such as paying off the mortgage
- Annual living expenses for your family
- The number of years until your children are independent
- Other assets that will help meet your family's needs
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