There’s nothing like the peace of mind that comes from knowing you’ve done everything you can to protect the future of the people who matter most. That’s why life cover can be so valuable.
Life cover pays a benefit to you, your beneficiaries or your estate if you die or you’re diagnosed with a terminal illness. You or your family can use that payment in any way – to pay off debts, take care of the costs of living with a serious illness, or simply cover living expenses until life gets back on track.
But while the idea behind life cover is simple, that doesn’t mean all policies are the same. Here are three things to think about when you’re choosing life cover and setting up your policy.
How much cover is enough?
Deciding on the right level of cover is a very personal decision. You’ll want to think about how much money your family would need to replace your income and the financial support they’d require if you were no longer around. That includes paying off your mortgage, credit cards and other debts, taking care of childcare costs or school fees, and covering ongoing living expenses.
Remember to factor in other funds your family might be able to access – including money from your super, your savings, the sale of any investments you have, even your leave balance if you’re working.
To help you, the Australian Securities and Investments Commission (ASIC) has developed a life insurance calculator to estimate the amount of cover you might need.
For personalised advice from a qualified professional, talk to a financial adviser. By looking at your current situation and future goals, they can help you decide how much life cover you need now, as well as how your needs might change over time.
How is life cover paid out?
Your life cover benefit is typically paid to your nominated beneficiary (the person or people you name who’ll benefit if you pass away) or the policyholder, such as you, your spouse or your estate.
If your policy is held inside super, the rules are a little different. Because the trustee of the super fund is the policyholder, it’ll receive your benefit from the insurer. The trustee will then pay your benefit to your beneficiaries, or to your estate.
There are also differences in how life cover benefits can be paid and how they are taxed when held inside super. The rules are complex and everyone’s situation is different, so it’s important to seek professional tax advice.
How is my policy structured?
When you buy life cover, it’s either a ‘stand-alone’ cover, or a ‘linked’ cover as part of a policy that includes total and permanent disability (TPD) or trauma cover – or both. Typically, linking covers will reduce your premium but may also impact the total benefit if you need to claim.
For example, let’s say you have a $1 million life cover linked to $500,000 TPD cover. When you make a successful claim on your TPD cover, your life cover benefit will be reduced by the amount paid out.
The good news is that you may be able to buy back extra life cover in the future. Buy-backs can be extra-cost options. They must be in place before the claim occurs.