Life insurance cover: Is it time to get protected?

Hard to believe but true - from the moment we are born we are actually dying! It's going to happen, one of the great facts of life - like taxes. But often in the course of our busy lives we neglect to take our mortality into account. It's often only when we take on a major debt - such as the purchase of a home - or when we become parents that we even begin to consider the need for life insurance.

Who needs life insurance?

The curious thing about life insurance is that unlike other types of insurance, the policy is not going to be of direct benefit to the policy holder (in most cases). The people who will benefit from your policy are those people mentioned in your Will, to whom you leave your estate when you die. It's a way of boosting the value of the estate and providing additional security to your loved ones when you are no longer around to provide for them. It will help to cancel out any debts you may have and perhaps leave a little extra for your beneficiaries. That said, some life insurance policies can also provide benefits before you die, should you be diagnosed with a terminal illness.

There are restrictions on when you can take out a life policy and some policies can't be renewed past about age 75. In addition, generally speaking, superannuation funds do provide a life cover, but this is usually very limited and only grows in size as super contributions increase.

In later years, the need for life insurance is reduced as most people have acquired assets by then, paid off debts and probably no longer have dependent children.

What types of life insurance are there?

There are two primary types of life insurance on offer, term life and permanent (often referred to as whole of life) insurance, although there are different variants on the theme within each of these categories. The way they pay benefits varies and they may or may not have an investment component.

Term life insurance is the most favoured policy type, providing cover for a specified amount of time. If a person dies within the covered time period, the insurer pays surviving loved ones a specified death benefit. Term life has an expiration point (a set age at which the insurer will no longer pay out) and tends to be cheaper. The premiums are supposed to be set and renewed each year - but watch out for price hikes and check the fine print to see whether your costs are fixed or if the insurer is at liberty to increase your costs. A relatively new type of term life policy will actually refund your money if you are still living when the cover period ends. (Now, that could be a nice little bonus for you later in life!)

Whole-of-life insurance provides the survivors with a death benefit, plus some other redeemable value as this type of policy has an investment component. It is sometimes referred to as "permanent life insurance" as there is no expiration point (because it is also an investment that has acquired value). The additional value may be an agreed cash value. The policy premiums are fixed for the duration and this may make them seem pricier in the early years. For some people the investment component is particularly attractive. However, most financial advisors will tell you that, in the long run, it would be better to take out a cheaper term policy and invest in another asset for a higher return.

Within the permanent health insurance category there are a range of other types of policies on offer - whole-of-life is just the most commonly adopted one. They vary in the ways they accumulate value, when they expire (eg age 100 or never) and how cash values, dividends and so forth are agreed and when they are paid out.

Factors affecting the premiums include your age at the time the policy is taken out, current health status, gender, whether you smoke, occupation and the amount of time you have been paying your premiums for.

When should I review my life insurance policy?

Policies renew annually, usually until you notify the insurer that you want the policy amended or cancelled. If your circumstances change, however, you may want to review your policy. People commonly reassess their insurance around the time of major life events such as getting married or when they are planning to have children. Be clear on the exclusions. You can be so excited by the idea of what is covered that you can overlook the impact of what isn't; if and when a claim is necessary (which, let's hope, is a very long while off!)

What else covers life's misfortunes?

Many insurers offer financial protection for some of life's other potential misfortunes such as injury, illness and income loss. Trauma cover can provide a lump sum payment to a person if they survive a serious medical condition, such as cancer or a heart attack. Income protection can provide regular payments to a person if they are unable to work through sickness or injury. Total or permanent disability insurance pays an agreed sum in the event that you are stricken with a permanent disabling condition through illness or accident.

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