Do You Need Life Insurance?

When we think about life insurance, many of us picture a policy that only people nearing retirement need. But the reality is, life insurance is an important financial tool for people at all stages of life, especially if you’re a young professional, in a de facto relationship, or a parent. Life insurance is there to provide financial support to your loved ones when you can’t. So, the question is: Do you need it? 

What Is Life Insurance?

Life insurance provides a safety net in case the unexpected happens. Essentially, if something were to happen to you, whether it’s an accident, serious illness, or death, it can offer your family financial support. The payout can be used to cover living costs, debt repayments, or even long-term goals like your children’s education.

There are various types of policies available in Australia:

• Life Cover (Death Cover): This is the most basic and common form of life insurance. It pays your beneficiaries a lump sum if you pass away or are diagnosed with a terminal illness, ensuring your family doesn’t face financial hardship during an incredibly difficult time.

• Total and Permanent Disability (TPD) Insurance: If you experience a debilitating accident or illness and can no longer work, TPD insurance provides a payout that helps cover your living expenses, medical treatment, and possible home adjustments.

• Trauma Insurance: Sometimes referred to as critical illness cover, trauma insurance offers a lump sum if you are diagnosed with a severe illness like cancer or have a major medical event like a heart attack or stroke. This gives you financial relief while you focus on your recovery.

• Income Protection Insurance: If you find yourself unable to work due to illness or injury, income protection insurance replaces a portion of your income for a set period, ensuring you can maintain financial stability.

Each of these policies serves a different need, but they all aim to protect you and your loved ones from the financial impact of unexpected events.

Why You Might It

Whether it is necessary depends on your individual situation. It’s particularly relevant if someone relies on your income or if you have substantial financial obligations. Here’s a closer look at situations where life insurance might be beneficial:

You Have Debt or a Mortgage

If you have significant debts or a mortgage, life insurance can help ensure that your loved ones won’t be left to manage these alone. A life insurance payout can clear your debts, allowing your family to stay in the family home without worrying about mortgage payments or other liabilities.

You Have Children or Dependents

Raising children is costly, and life insurance can ensure that your family’s future remains secure if you’re no longer there to provide. The cost of education, childcare, and even everyday expenses can be overwhelming, and life insurance can provide your family with the funds needed to cover those costs. If you’re a single parent, life insurance becomes even more crucial, as your children will be relying on one income.

Your Partner Relies on Your Income

Even if you don’t have children, life insurance might still be a good idea if your partner depends on your income. Whether you’re sharing rent, mortgage payments, or household expenses, life insurance can help protect your partner financially if something were to happen to you. The payout can help them cover bills, avoid dipping into savings, and maintain their standard of living during a difficult time.

You’re Young, Healthy, and Single

If you’re young, healthy, and don’t have any dependents, life insurance might not seem essential. However, there are still good reasons to consider it. For one, premiums are often much cheaper when you’re young and in good health. Moreover, if you’ve taken on debt (like a personal loan or car loan), life insurance can cover these costs if something happens to you. It’s also a great time to consider income protection, which can help if you get sick or injured and are unable to work for a while.

You Have a High-Risk Job or Hobbies

If your job is physically demanding or you engage in risky hobbies, life insurance should definitely be considered. Professions like construction, mining, or emergency services come with inherent risks, and life insurance can help protect your family in case of an accident or severe injury. Similarly, high-risk hobbies like mountain climbing or motorsports also increase your chances of injury, making it essential to have financial backup through life insurance.

How Much Insurance Do You Need?

The amount of insurance you need depends on your financial responsibilities and goals. There are a few key factors to consider:

• Dependents: Do you have a partner or children who rely on your income? If so, consider how much money they would need to cover daily expenses, education, and any debts you might have.

• Debts and Loans: Do you have a mortgage, car loan, or credit card debt? If so, the payout from your life insurance policy can help clear these financial obligations.

• Other Expenses: Beyond debts, think about what your family would need in terms of living costs if you were no longer there to support them. This might include rent or mortgage payments, childcare, medical costs, and even funeral expenses.

Once you’ve assessed your financial needs, you can start shopping around for policies that meet your requirements. Insurance calculators provided by various life insurers or government sites like ASIC’s MoneySmart can help give you an estimate of the coverage you might need based on your personal situation.

Life Insurance Through Superannuation vs. Standalone Policies

Many Australians have life insurance through their superannuation fund, which can be a convenient and cost-effective option. Super funds often offer default life cover as part of the package, meaning it’s automatically included in your fund once you reach a certain age (usually 25 or older). While this is an easy way to get some coverage, it might not be sufficient for your family’s needs, especially if you have significant debts or dependents.

Standalone life insurance policies, on the other hand, offer more flexibility. You can choose the exact level of cover you need, tailor the policy to your situation, and ensure it covers all your financial obligations. The downside is that you’ll be paying for the policy out of your own pocket, but it’s worth considering if you want more control over your coverage.

Some people opt for a combination of both: they keep basic life insurance through their super but purchase additional coverage separately to make sure they’re fully protected.

Making Your Decision

Ultimately, the decision to get life insurance is about protecting your loved ones and ensuring their financial future if something were to happen to you. If you have dependents, significant debts, or a partner who relies on your income, life insurance can provide them with the financial support they need to cope with your loss. However, if you’re young, single, and have no financial responsibilities, you might not need a large policy just yet.

The key is to assess your personal situation and decide whether the benefits outweigh the cost. If you decide you need coverage, comparing quotes from different insurers and considering policies both through super and independently can help you find the right fit.

Any advice is general in nature only and has been prepared without considering your needs, objectives or financial situation. Before acting on it, you should consider its appropriateness for you, having regard to those factors. Before making any decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement.