A financial advisor recently recommended we take out a variety of life insurances. What do we need?

The only challenge with life insurance is that you can’t buy it when you need it.  You need to buy it ahead of time just in case you might need it.   

Generally speaking, the more debt and dependants you have the more insurance you need.  In your early 20s you may not need a lot of insurance but as you go through life, have children and get a mortgage, you need the most amount of insurance.  Then as your children leave home, your mortgage is paid off and you start accumulating retirement funds, your need for insurance reduces.   

Each individual needs to consider which risks they may face in life and then decide whether they want to self-insure or to pass the risk onto an insurance company by taking out the appropriate policies.  However, you will most likely need income protection insurance.  This is because your ability to earn an income is your biggest asset.  If your car gets smashed, you may lose $5-20k depending on the value of your car.  If you lose your income for any length of time the cost can be in the hundreds of thousands.

It’s important to review your insurance needs every year or when your circumstances change, to ensure you have the right cover for the potential risks you face. 

The different types of insurance 

Total & Permanent Disablement 

If you become permanently disabled, this type of insurance may pay you a lump sum.  There is usually a minimum six month period before the payment is made so the disability can be verified that it is permanent.  This type of insurance is usually inexpensive.  

Trauma Protection 

Sometimes referred to as serious illness cover.  It’s a lump sum payment, payable if you suffer a trauma or critical illness, like a heart attack, stroke or cancer.  This trauma may result in many unforeseen expenses such as the cost of medical treatment, rehabilitation (including career retraining) and home help. 

Medical Insurance 

With the constant rising costs of medical care and hospital waiting lists growing all the time, this insurance enables you to receive private medical care quickly.   There are two main types of medical insurance, one is for hospitalisation and specialist care, the other is comprehensive also covering doctor and dentist visits. 

Life Insurance 

This is when you depart this world too soon and is payable to your policy owner or joint owner as a lump sum.   It could be used to eliminate any debts you have, pay off your mortgage, cover funeral costs, pay for the future education of your children and provide an income for your spouse and family.   There are two main types:  Endowment and whole of life policies which have higher premiums because they have a savings component to them.  I am not a big fan of these policies because insurance and investment are quite different and I don’t believe they work well in the same product.  The second type of life insurance is term life.  This is simply a set amount of cover for a set time period and is cheaper than endowment policies because there is no investment component.   

Income Protection 

Also known as disability insurance and is one of the important types of insurance as it gives you the ability to insure one of your most valuable assets; your ability to earn an income.  For example if you earned $50,000 per annum and are now aged 40, your future income is $1.25m (25 years x $50,000).  It is the potential loss of this income that an income protection policy is insuring.  A monthly income is paid to you if you are not able to work due to an illness or injury.   Your policy will have a waiting period of 4, 8 or 13 weeks, chosen by you, before any income is paid.  You are able to insure up to 75% of your taxable income under most income protection policies.  Your ability to earn an income is one of the most valuable assets you have. 

The Stats! 

1 in 5 people will have a critical illness during their working lives 

1 in 7 people will die before they reach the age of 65 

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