According to figures compiled by the APRA (the official governing body for life insurance), approximately $8.08 billion was paid out in death and disability insurance claims in Australia in the 2015-2016 financial year. That?s a lot of money and it?s worth ensuring that, if something were to happen to you, your family would be entitled to some of that money through a term life insurance policy.
What is term life insurance?
Term life insurance, provides a lump sum payment to your nominated beneficiaries (your spouse and/or children) when you die. It can help your loved ones to pay out any debts that you may have together (such as a mortgage) and it can provide for the future needs of any children you have (such as schooling costs, which are considerable). It can also provide a lump sum of money that that your partner can invest and gain an income from.
“Term” life is short for “Yearly Renewable Term”, meaning the premiums are reviewed by the insurers each year. This is in contrast to the old-style, conventional life insurance that had a fixed premium for the duration of the contract with an investment component, bonuses, and a cash value. This type of cover is not sold anymore in Australia. So really, when we talk about life insurance we are always talking about Yearly Renewable Term Life Insurance.
In short, the purpose of term life insurance is to ensure that your family will, as far as is possible, still be able to afford the life that you planned to have. Term life insurance is a way to prevent financial trauma from compounding the emotional trauma they would inevitably suffer.
In 2010 ANZ and OnePath released the Picking Up The Pieces report to examine the financial impact of the death of a parent on Australian children and their families. Some key findings from the report included:
- 64% of deaths were the family?s main or equal financial provider.
- Almost one third (32%) of families moved house as a result of financial pressure.
- 1 in 4 children had to move schools within two years of the death due to financial pressure. The majority of these children suffered a mental health issue and weakened academic performance.
- More than half of families (56%) went on fewer family outings.
- 60% of parents said they were not able to support their children as much financially after the death.
How much term life insurance do I need?
The amount of cover you should have (your “sum insured”) will depend upon both your family and financial situation. In general, though, a life insurance policy should where possible:
- Provide a lump sum to pay out all debts you owe (e.g. mortgage, car loan, credit cards).
- Provide a lump sum to invest for future income.
- Provide a lump sum to cover any known, large future expenses (e.g. school fees, adult child’s wedding).
Peter, aged 40, is married with children. He and his partner have a mortgage of $400,000 and a car loan of $40,000.
His partner works part-time, but he wants to leave $500,000 as a lump sum for her to invest, because this will help to replace his income.
He also wants to put aside $150,000 to cover future education expenses for their two children.
In summary, he has calculated his life insurance needs as follows:
|$500,000||Lump sum to invest|
|$40,000||Car loan repayment|
|$150,000||Future education expenses|
|$1,090,000||Total life insurance|
Please note this is just an example – the needs of each person will be different. As an information provider, CANSTAR only provides general advice and does not take into account your objectives, financial situation, or needs. You should talk with a financial adviser about your specific and individual needs.
How much does term life cover cost?
The following premiums are current as at our 2016 Advised Life Insurance star ratings. Monthly premiums have been rounded to the nearest dollar.
|Term Life (Male – Stepped)
Monthly Premiums ($/month)
|Term Life (Female – Stepped)
Monthly Premiums ($/month)
|Source: www.canstar.com.au Average premiums current as at 17 August 2016. Average premiums have been rounded to the nearest dollar.|
To find out more about getting term life insurance from a financial adviser and to compare your options, read our annual Life Insurance Star Ratings report.