I don’t meet many people that like paying for insurance, but being insured provides a level of comfort in knowing that should something nasty occur, you have transferred the financial risk of an unforeseen event to a third party. So what is life insurance and what exactly does it cover?
Take a moment to ask yourself these question; if you didn’t wake up tomorrow, how would your family cope financially? Would they be able to make the mortgage repayments? Would your spouse and children be able to maintain a reasonable standard of living? Life insurance doesn’t get a lot of attention in most households yet it is inevitable that some of us will need it one day. Read on to find out what it is, how it works and whether you and your family should consider it.
What is Life Insurance?
Life Insurance is a contract you purchase from an insurance company. Put simply, the contract says that the insurer will pay a specified amount if you meet the policy conditions. Life Insurance usually refers to four different types of insurances; Life, Total and Permanent Disability (TPD), Income Replacement or Critical Illness (sometimes called Trauma). Each of these are different in what they offer and the terminology varies between insurance companies, e.g. Life Cover is sometimes known as ‘term life insurance’ or ‘death cover’ and Income Protection is sometimes called Income Protection or Salary Continuance.
The following explains what each of the different types are and how they work.
Types of Life Insurance
Life Insurance
Life insurance pays a lump sum in the event that the insured person has a terminal illness or dies. The person/people you nominate to receive this payment is/are referred to as beneficiaries on your policy.
Life insurance can be used for any purpose. For example to repay debt, fund children’s university education and/or maintain your family’s current lifestyle.
Total and Permanent Disability (TPD)
TPD pays if you become Totally and Permanently Disabled. The definition of TPD can vary based on the contract but it generally means that the insured person is ill or injured to such an extent that they are unlikely to work again. TPD is usually combined with Life Insurance and pays out a lump sum figure to help with things like medical care, rehabilitation and to fund future living expenses.
Critical illness or trauma
Critical illness insurance pays a lump sum in the event you suffer a specified medical condition. These medical conditions vary from insurer to insurer but the most common claims[1] are from cancer, stroke, heart attack and cardiovascular related illness.
These payments can be used to cover the costs of medical care after an injury or illness, repay debts or ‘buy’ recovery time and delay a return to full-time work.
Income protection
Income protection provides a monthly payment if you’re unable to work due to illness or injury. Essentially, it is designed to replace your regular income as very few employers continue to pay wages in the event of a long-term illness.
Importantly, some income protection insurance includes a benefit on partial disability. In other words, if you’re still able to return to work but in a lessor capacity earning a reduce income, the policy will pay you a proportionate benefit.
How do I get Life Insurance?
The best way is to get help from a financial adviser. They can help determine an appropriate level of cover, select a suitable policy, guide you through the application and help structure the policy ownership.
One of the most common misconceptions is that life insurance purchased through your compulsory superannuation fund covers your needs. However, very few insurance policies have adequate cover in the event of a serious accident or death.
Always read the fine print when purchasing and if you are unsure, get in touch with us so we can help get the best outcome for you.
[1] Source: MLC 2014 Claims Statistics at a Glance.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online.
