Are you single?
Do you have kids under 18 years old?– Two questions before you start
When we talk about life insurance in Australia. We talk about three different types of coverage: life insurance, income protection and total and permanent disability (TPD) cover. If you already have life insurance either outside or inside of your superannuation fund, your insurance policy might already include one or all three components above. Confused?
- Life insurance is paid to your nominated beneficiaries when you die before you turn 65 years old. Life insurance policy cover for people over 65 years old is usually very expensive. The cut-off is age 65 because that is the threshold age when government aged pension kicks off in Australia. This number would probably fluctuate in the future and might end up being 70 years old or older when you can qualify for the aged pension.
- Income protection insurance is paid to you either as a one-off lump sum or monthly ever year until you turn 60 years old. The condition that this policy will kick off is because you cannot work in a job anymore while you are still alive. Note the 5 years gap between when your income protection insurance runs out and when the Australian aged pension would kick-off (if you qualify for one).
- Total and permanent disability (TPD) insurance is paid to you a one-off lump sum when you become disabled for life. As a result of which, you can no longer hold any job.
This post is part of a series of posts on personal finance skills for millennials.
How does it work?
For instance, if you get involved in a traffic accident and you become disabled; and your insurance policy cover has both an income protection component and a TPD component, you will get paid a one-off TPD lump sum for when you become incapacitated.
You will probably need this lump sum payment to do all or some of the following things:
- Renovate your house/apartment for accessibility
- Sell your current dwelling, and buy/rent another property with accessibility friendly facilities
- Organise medical treatments, ongoing out-of-pocket medical cost and regular physical therapies.
Every month after that until you turn 60 years old, you will receive (usually) the equivalent of 75-85% of the regular salary of your last job (before tax). You will still need to pay your taxes by the way.
Life Insurance for a Single Person
You might not need any life insurance policy, but you will need income protection and a TPD insurance.
Why do you need life insurance if you are NOT a single person?
“If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance.”― Suze Orman
If you are the primary income earner in your household and you have a mortgage, the life insurance will be used to pay off all or some of the following things you might own other people or financial institutions:
- Mortgage (otherwise your dependents might no longer have a roof over their heads),
- Credit card loan,
- Other loans,
- Living cost for those you leave behind until they can get on their feet independently. Usually, this means enough monthly living cost for your family members to a maximum of 10 years.
What if I have no mortgage and no other loan, but my loved ones will still need some living cost support should I die unexpectedly?
- Do you have other investment that they can live off from for the next 10 years?
- How financially independent are your loved ones?
Depending on your answers, then you might or might not need life insurance.
How to choose the right level of life insurance cover?
The general rule of thumb is to get life insurance 10-12x your current annual salary. It will depend on how many kids you have, how big are your financial obligations (mortgage, car loans, etc.). If you don’t have that many debts and you have good investment assets, then you can probably get away with a lower insurance cover. Each individual circumstance is unique.
Use this calculator to work out how much life insurance you need. You can get a life insurance policy inside or outside of your superannuation. You can read this article to read about the pros and cons.
How to choose the right level of income protection cover?
Read this article from Moneysmart website. You would usually need to go the specific calculator of an insurance provider to get an estimate. Make sure you tick the option `cover until the age of 60 years old` and not just for 2 years.
How to choose the right level of total and permanent disability (TPD) cover?
Read this article from the Moneysmart website. Usually, you always have to get both life insurance and TPD cover. You can’t get one and not the other. Depending on the financial institutions that underwrite your insurance, the options will vary widely between each provider.
A short note about the life insurance premium cost
As you age, your life insurance premium fee will increase annually up to a point where it makes no sense to keep life insurance due to a few reasons:
- You are still alive, and your chance of being alive past the age of 65 increases.
- Your chance of needing life insurance decreases.
- The cost for the insurance company to pay out the insurance if you pass away at your current age increases significantly.
- Your premium insurance is way too expensive.
- Your household debts are probably under control by then since you will have had a long working life and savings – which mean that you only have productive assets and zero liability (ideally!).
You will reach this tipping point at around age 50.
The next important thing to think about is to have enough savings and assets that would sustain the gap years between when you can no longer own life insurance and when you are eligible for aged pension (let’s also hope aged pension still exists when you have to retire).
Some useful links: