How to choose life insurance: 5 questions to ask yourself before signing up

Trying to work out how to choose a life insurance policy? Here’s a handy five-point plan from Canstar’s life insurance expert Roger Mai, which could help you through this often complex decision-making process.

Life insurance is designed to help you and your family cope financially if your ability to contribute to the household budget is reduced or interrupted for specific reasons. Choosing life insurance can be as straightforward as asking yourself these five questions:

1. Do I need life insurance?
2. What type of life insurance do I need?
3. How much life insurance do I need?
4. How much is life insurance going to cost me?
5. How can I buy life insurance?

Please note: This article covers questions that income earners – people who earn money from a salary, wages, government payments and/or investments – should ask themselves. It may not be applicable for those people who are self-employed, such as small business owners.

1. Do I need life insurance?

At its core, life insurance is much like any other type of insurance – if something covered by the policy happens, the insurance provider promises to provide financial help later if you pay it small amounts of money over time. Whether or not you need life insurance depends on your financial circumstances, including considerations around what would happen if you couldn’t contribute money towards the running of your household.

Common situations where life insurance may help could include:

• You are the sole or main income earner in the household: In this circumstance, if you died or were injured and weren’t able to pay the mortgage or other bills, how would your family survive? Do you have enough savings put aside to cope? Could you sell any assets to assist? If the worst were to happen, could your family afford to cover your funeral expenses?
• You have a mortgage or other loans: If you have a home loan or a car loan, for example, your lender will require you to make your repayments on a regular basis. What would happen if you had to go for a period of time where you couldn’t contribute towards these debts?
• You have dependents: If you were to pass away, could your family afford the lifestyle they currently have? How would the family pay for things such as their ongoing financial needs, including education or healthcare?
• You have a major medical event (such as cancer or a heart attack): If you only have health insurance, this may not cover all of the costs involved in your recovery. If you have previously purchased life insurance, it could help with some of the extra expenses.

Read more: What are the pros and cons of life insurance?

One way to work out if you need life insurance could be to put together a household budget, based on your and your family’s current income and expenses. Then, manipulate that budget to see what would happen if one wage was reduced or no longer available.

Explore different scenarios with Canstar’s Budget Planner

The next step towards answering this question should be to check if you have life insurance in your superannuation account. If you do, check what type of insurance it is, what it covers you for and read the Product Disclosure Statement (PDS), Target Market Determination (TMD) and any other important documents. This may help you to work out if the insurance in your super provides enough cover for your needs. The cost of insurance held within super comes out of your retirement balance, so it could also be a good idea to look at how much it is costing you (so you can compare it; read more below on that).

2. What type of life insurance do I need?

If you decide you do need to explore life insurance further, the next step could be to explore what type of insurance you may need. There are two broad categories:

1. Death/terminal illness cover: Insurance that provides cover when someone dies or is diagnosed with a terminal illness
2. Unable-to-work cover: Insurance that provides a payout, or a series of payments, if a person is unable to work (but isn’t expected to die) due to particular circumstances.

These life insurance products may come as standalone products which can be bought individually, or as a package where you can combine two or more different types of cover, depending on the provider you choose. The Australian Government’s Moneysmart website states that buying packaged insurance could impact the payout amounts you can receive for a successful claim, so check the PDS and TMD carefully. Options include:

• Life insurance (also known as term life insurance) pays an agreed lump sum of money if you die or are diagnosed with a terminal illness.
• Trauma insurance pays a lump sum in the event that you suffer a medical trauma that impacts your life, for example if you are diagnosed with cancer or suffer a heart attack.
• Total and permanent disability (TPD) insurance pays a lump sum amount if you become totally and permanently disabled and can’t return to work again.
• Income protection (IP) insurance  provides a regular monthly payment to replace up to a certain percentage of your income if you’re unable to work for an extended period of time due to illness or injury.
• Accidental death insurance pays a lump sum if you die from an accident (but not if you die in any other way, such as from an illness).

Need to research more? Read Canstar’s guide to what different types of life insurance can cover

3. How much life insurance do I need?

Once you’ve determined what type(s) of life insurance you would like, the next step is to work out how much cover you need. This means working out the dollar value you would need to be paid if you or your family had to make a claim.

This is where your budget (discussed above) comes in. If you work out your estimated yearly expenses, this could give you an indication of how much life insurance you might need if your wage was reduced, interrupted or stopped. Don’t forget to factor in costs over successive years, and also to add in any possible payouts from life insurance in your super (if you have it).

Explore in detail: How much life insurance do I need?

You could also use a tool such as Canstar’s Life Insurance Needs Calculator to help you work out an estimation (this calculator, however, does not take into consideration a partner’s income).

Tip: The COVID-19 pandemic has impacted insurance policies. It could be a wise idea to ask any life insurance providers you’re considering what their policies are when it comes to claiming against coronavirus-related conditions.

4. How much is life insurance going to cost me?

How much life insurance will cost in premiums per month will depend largely on the type of insurance you take out, the extent of your cover and the insurance provider you choose, as well as a range of other factors. These other considerations could include your medical history and if you are, or were, a smoker. For this reason, it can be difficult to work out an exact cost without getting a quote from insurance providers. However, Canstar crunched some average numbers from our database in this article, which may help you to work out a ballpark figure.

Whether or not you can afford life insurance will come down to your personal circumstances. You will typically be required to pay premiums on a monthly basis, although some providers may let you choose to pay them fortnightly or annually. If you have life insurance in super, the premiums are usually deducted from your super account balance (impacting the amount left to invest, which could in turn reduce the amount you have in the account when you retire).

5. How can I buy life insurance?

Once you’ve weighed up the potential costs of life insurance and whether you can afford it, the next decision to make is how you want to buy it. There are a number of ways to do this, including:

• Directly from an insurance provider – you can purchase life insurance in much the same way you can other types of insurance, by approaching a provider and asking for a quote. You can compare life insurance policies and income protection policies with Canstar, including using our expert Star Ratings system to help create a shortlist of providers.
• Through your superannuation fund – you could speak to your super fund or sign up to a new super fund that provides life insurance. Be sure to read all the important documents and consider the costs involved, along with what impact they might have on your retirement nest egg, before you sign up.
• Through a financial adviser
• Through an insurance broker
• Through your employer – some organisations may have group life insurance available to their employees, which means that they have made a deal with a life insurance provider to offer cover for their workers.

Explore: Best Life Insurance & Income Protection Policies on Canstar’s database

If you are in doubt, it might be a good idea to seek suitably qualified, independent advice. And, as with any big financial decisions, if you need something explained further don’t be afraid to ask the insurance provider. Be sure to read all important documents they provide before signing up, such as the PDS, TMD and any other terms and conditions.

Cover image source: Pla2na/Shutterstock.com