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Life Insurance: A Comprehensive Guide to Protecting Your Loved Ones
Key Points
- The most important reason to consider taking out life insurance is to protect your family if you die or become unable to work.
- There’s a good case for anyone with dependants or people who plan to have dependants to take out life insurance.
- Life insurance policies can be bought through life insurance companies, financial advisers or brokers, or through superannuation funds.
- The amount you roughly need is the gap between what your dependants require, and the value of your assets (not including your family home).
- Whatever you choose, it’s important to reassess your life insurance cover against your needs as life changes.
Why Should You Consider Life Insurance?
Life insurance isn’t just about financial security—it’s about peace of mind. Here are some key reasons to consider it:
To Protect Your Family and Loved Ones
If your loved ones depend on your income, life insurance can replace that financial support. This is particularly crucial for families with young children, spouses, or adult dependents who might struggle to maintain their standard of living without you.
To Leave an Inheritance
Even if you don’t have significant assets, life insurance allows you to create an inheritance for your dependents. With the help of financial experts, you can leave behind a financial legacy.
To Pay Off Debts and Expenses
Life insurance can cover more than just daily expenses. It can also help pay off significant debts like mortgages, car loans, and credit card balances. Additionally, it can ease the burden of funeral costs, which can range from $4,000 to $14,000.
To Provide Peace of Mind
While no amount of money can replace a loved one, life insurance offers reassurance. Knowing your family will be taken care of financially can provide a sense of security during uncertain times.
Understanding the Types of Life Insurance
Life insurance isn’t a one-size-fits-all solution. Different policies cater to different needs:
- Life Cover (Death Cover)
- Pays a lump sum to beneficiaries when you pass away.
- Helps cover living expenses, debts, and other financial obligations.
- Total and Permanent Disability (TPD) Cover
- Provides a lump sum if you become permanently disabled and unable to work.
- Often used for rehabilitation, medical costs, and ongoing living expenses.
- Income Protection Insurance
- Replaces a portion of your income if you’re unable to work due to illness or injury.
- Ensures that everyday expenses are covered while you recover.
When Should You Get Life Insurance?
Life insurance becomes essential at various stages of life, particularly when you take on responsibilities or financial obligations. Consider getting life insurance when:
- You Get Married: Your spouse may rely on your income to maintain a shared lifestyle or pay joint debts.
- You Have Children or Dependents: Life insurance ensures their financial stability, covering everything from education to everyday expenses.
- You Take on a Mortgage or Debt: A policy can prevent your family from being burdened with unpaid debts.
Even if you don’t yet have dependents, getting life insurance early can save money. Premiums are often lower when you’re younger and healthier, as most insurers require a medical check to determine your rates.
How Much Life Insurance Do You Need?
The amount of life insurance you need varies depending on your financial situation and life stage. Here’s how to calculate it:
- Assess Your Family’s Current Resources: Include savings, superannuation, shares, and existing insurance policies. Don’t forget to exclude the value of your family home, as it’s not a liquid asset.
- Determine Your Family’s Needs: Consider outstanding debts, such as mortgages or loans. Factor in ongoing expenses like childcare, education, and living costs.
- Calculate the Gap: The difference between your family’s available resources and their financial needs is the amount of coverage you should aim for.
Keep in mind that your insurance needs will change over time. For example, a 22-year-old with no dependents may only need enough to cover funeral expenses, while a parent with a mortgage and young children will require much more. As your children grow, your debts decrease, and your superannuation builds up, you may need less coverage.
Other Considerations for Life Insurance
- Funeral Costs: Funerals can be costly, ranging from $4,000 for a basic cremation to $14,000 for an elaborate burial. If you don’t have a policy that covers funeral expenses, consider other options like pre-paid funerals, funeral bonds, or funeral insurance. You could also designate a savings account for this purpose, but ensure your beneficiaries are aware of it.
- Regular Reviews: Life is constantly changing, and your insurance should adapt to your evolving needs. Review your policy regularly—especially after major life events like marriage, the birth of a child, or paying off a mortgage—to ensure your coverage remains adequate.
Life insurance is more than a financial product—it’s a safety net for your loved ones and a way to plan for the unexpected. Whether you’re just starting out or reassessing your needs, understanding your options and getting the right coverage is crucial.
If you’re unsure where to start, consult with a life insurance provider, broker, or financial adviser. They can help you navigate the complexities and tailor a policy that suits your needs and budget.
To learn more about financial security, speak to our qualified team of financial planners and wealth creation experts. Contact us online or call us on 03 9427 0855.
Source: NAB
Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/personal/life-moments/family/life-insurance
National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.
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