Do I really need life insurance?
Taking out life insurance can seem daunting; with so many different options and levels of cover, it's easy to feel overwhelmed. But don't be put off, it's one of the most important things you can do though to ensure your family remains financially secure if you become unable to provide an income.
It probably won't surprise you to hear that many people end up buying a generic group life insurance policy offered by their super fund, simply because it's the easiest way of dealing with it. Just because it's the easy option, doesn't necessarily make it the right option. When it comes to insurance, one size definitely doesn't fit all. The most important thing to remember is to get the right amount of cover. Depending on your personal circumstances, you may need more cover, or less, than you're currently getting.
There's a perception that life insurance is an unnecessary cost; that it's something to think about 'down the line', when you really, really need it. For the vast majority of us though, that's just not the case. Sure, if you're a single 25-year-old with no debt and no dependents, you can hold off. And if you're retired with no debt and enough super to keep you going, you could also say 'no thanks'. But for everyone in between, those with dependents or debt, life insurance is a must.
If you think the limited life insurance offered by your super fund is enough, go and check it out. It probably won't be providing nearly as much cover as you thought, or need.
If you're still not sure whether you need life insurance, consider these questions
- Are you married?
- Do you have dependent children or other relatives?
- Do you have major financial obligations, such as a mortgage?
- Do you own a business?
Answered yes to any of them? If so, then life insurance is something at least worth considering.
How much is enough?
There are some key factors to consider when deciding how much cover you need.
First of all work out exactly what you need by calculating your ongoing costs and future costs. Ask yourself these questions:
- Do you want your children to have a private education?
- Do you want to help pay their university fees?
- Do you want the mortgage completely covered in the event of your death?
- Do you want to leave just a lump sum, or also provide an income stream for your spouse to secure your family's lifestyle?
These are just examples of what you need to ask yourself when assessing what level of cover suits you best. You will no doubt have more questions, depending on your own circumstances.
Keep in mind that it's not just the breadwinner in the family who needs to take out life insurance. Let's look at an example: John and Alice are both 35 with two children under five. They are non-smokers with no pre-existing medical conditions that would cause any trouble when it comes to getting life insurance. John works full-time and earns $100,000 a year, while Alice works part-time and earns $35,000 a year. They have $250,000 left on the mortgage and a $20,000 car loan. They also have $10,000 invested in equities.
It's pretty clear that if John were to die, Alice would struggle financially raising two children on her salary. But if John had, say, $500,000 life insurance cover, then Alice could pay off the family's debt and still have a steady income stream for a period of time.
But what if Alice died, leaving John to look after two young kids? Sure, he's on a decent salary, but without Alice he either has to cut back his working hours or pay for full-time childcare (assuming the grandparents aren't up for the task). Whether John chooses to cut back his hours in the office or pay up for childcare, he's now in a situation where he can't make the mortgage and car payments. On the other hand, if both Alice and John take out life insurance policies, they will each be able to maintain the family's lifestyle in the event of the other's death.
Many people have this belief that life insurance isn't affordable, but that's just not the case in many situations. Take John and Alice. Since both are healthy non-smokers, the monthly premium for John would come in at approximately $30, while for Alice it would be even less, at approximately $25 a month. Not too much to pay for peace of mind.