Benefits of having life insurance: Is it worth the costs?

Life insurance can help to protect you and your loved ones in the event something unfortunate happens to you in your life. But you need to weigh up to pros and cons to see if it’s worth it for you.

Life insurance can include a range of cover and aims to provide financial support to you and any dependents if you suffer from an illness or injury that leaves you permanently disabled or out of work, or in the event of your death.

Figures from the Australian Prudential Regulation Authority (APRA) show 97% of all insurance claims for death were approved for 20 Australian life insurance providers during the 12-month period from 1 July, 2020, to 30 June, 2021.

But life insurance comes at a cost.

Figures from KPMG’s Life Insurance Insights show premiums increased 12% over a 12-month period to June, 2021, while the number of lives insured dropped 10%. Overall, the number of policies declined.

“We believe part of the decline can be put down to financially hard-pressed consumers looking to tighten their belts, given some see life insurance as a voluntary, not obligatory,  expense,” shared two KPMG experts.

A survey of 1,359 people for Real Insurance’s latest Family Concerns report found about 2 out of 5 (41.3%) of those questioned had no life insurance. Yet, about 3 in 5 (63.8%) were at least reasonably concerned or more that they did not have enough insurance cover to protect their family.

If you are considering taking out life insurance, or are undecided, you need to look at some of the potential benefits and downsides of having a policy in place.

You should also do plenty of your own research to determine whether life insurance is suitable for you, before you take out a policy.

Potential benefits of life insurance

Life insurance can bring a variety of benefits such as peace of mind and can help towards covering unexpected costs resulting from terminal illness. There are also a lot of options to choose from, depending on your personal needs.

Life insurance may provide peace of mind

If you have dependents, whether that’s a spouse, children or both, life insurance can help give you confidence that they will be more financially secure if something happens to you.

It’s important to do a thorough assessment of your financial situation and to consider the costs your dependents would need to cover in the event of your death, a permanent injury or illness, or disability.

This should include the amount outstanding on any mortgage or other loans, credit cards and any other debts as well as any child care, school fees and other everyday living expenses.

Life insurance can cover unexpected costs resulting from terminal illness

The financial ramifications of a terminal illness can be tough. Even if you have private health insurance, you may still have to pay a significant amount in hospital and doctors’ bills.

If your life insurance policy provides cover for terminal illness, you may receive a payout or benefit to help reduce the financial burden of your illness.

It’s important to note that many life insurance providers stipulate a condition on the maximum time left to live that you must satisfy to claim a benefit for a terminal illness.

The exact time period varies by provider, but is usually between 12 and 24 months. Some insurance providers may also require documentation such as medical certificates or your  medical history in the event of a claim.

Life insurance can be flexible

If you do decide to take out a life insurance policy, there are a lot of options to choose from. There are a range of policies available from providers that are suitable for most occupations and life stages, and most offer a wide range of benefit options.

It may be a good idea to do your homework. You may find it helpful to read any product disclosure statement (PDS) and target market determination (TMD) documents. You can request a copy of these from any provider.

Life insurance premiums are usually cheaper the younger you are, and can get more expensive as you age. When this applies, a policy has stepped premiums. Some providers may provide the option of level premiums, which means you can spread the amount you pay over several years, but you need to consider carefully if this works for you as it can be expensive in the early years.

Rebecca Pritchard, a senior financial planner at Rising Tide Financial Services, told Canstar there are benefits to starting a life insurance policy early.

“The biggest benefit of that is to be insured wholly,” she said. “That is, no exclusions, no loadings, no declines on cover.

“The older we get, the more likely we are that something will break down in our bodies or minds. So getting insurance before you have any pre-existing conditions is incredibly valuable.”

Potential drawbacks of life insurance

Potential drawbacks of life insurance include that your premiums may increase as you age, some exclusions may apply (such as if you have a pre-existing medical condition), and you may already have some life insurance that’s provided through your superannuation.

Your premiums may increase

When considering if life insurance is right for you, one of your main concerns may be what you’ll pay in premiums, and whether the benefits will justify the costs.

As we explained earlier, the premiums can go up as you get older and may be even higher if you have to disclose a pre-existing medical condition. In that case, you may also find that any potential provider may impose some extra conditions or even exemptions for life cover.

Your lifestyle may also lead to an increase in premiums, especially if you are a smoker.

What exclusions may apply to you

If you have a pre-existing medical condition then you may find you are restricted or even excluded from some life insurance cover.

A pre-existing medical condition is generally considered to be something that existed before you signed up for any new life insurance policy. It could be something that has happened to you and has been resolved, or something that’s ongoing and requires treatment.

Pre-existing conditions are dealt with on a case-by-case basis by life insurance providers. It will be up to your provider to determine what level of cover, if any, they are willing to provide, whether there may be exclusions, and at what extra cost in premiums may apply to you.

You may already have some life insurance

You may already have some life insurance cover through your superannuation and may not want to take out any new policy that duplicates what you already have. If your super does provide life cover then you may want to consider what that covers, if it is enough to meet your needs, and whether extra cover would be in your interest.

When considering the various pros and cons of having life insurance, it could be a good idea to seek some independent professional financial advice before deciding what, if any, life cover might be most suited to your needs.

You can use Canstar’s Life Insurance Needs Calculator to get an idea of how much life insurance and income protection cover you may need in the event that you die, suffer a trauma, become totally and permanently disabled (TPD) or if you become unable to work.

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Cover image source: Evgeny Atamanenko/Shutterstock.com