How to buy life insurance

Most people with dependants need some life insurance – just in case the unthinkable happens.

At a minimum, life insurance should cover your debts, funeral expenses, full repayment of your mortgage (including any early-repayment fee), and your family's immediate living costs.

As well, you should add in the amount required to replace a lost income, or pay for a caregiver, until the surviving family is no longer dependent on support.

Who are your dependants?
Life insurance isn't just for financial dependency. Consider the ways that you contribute to your family, and what you'd need to compensate for the loss of that contribution. This includes caregiving and childcare as well as financial support. It could also include the support you give to elderly relatives.

Our calculator provides an estimate of how much cover you need.

The most common types of life insurance are term life and whole-of-life:

• Term life insurance pays you or your chosen beneficiaries the sum assured if you’re diagnosed with a terminal illness or die within the period set out by the policy.
• Whole-of-life insurance lasts for life provided you keep paying the premiums. Whole-of-life policies are more expensive than term life policies.

As well as providing cover in the event of death, term life insurance policies usually have other built-in benefits. Five of the most common include:

• Terminal illness cover: you can get an advance on all or some of your sum assured if you’re diagnosed with less than 12 months to live.
• Funeral costs cover/bereavement support: your policy’s beneficiaries can apply for an advance to cover immediate costs such as funeral expenses.
• Children’s funeral costs cover: you get a limited payment to cover funeral costs if your child dies from accidental injury. Some policies also cover death from certain illnesses.
• Increase sum assured for major events: you can increase your sum assured without having to provide further medical information if you experience a major life event. Although it varies from policy to policy, common events include getting married or divorced, having children or taking out a home loan.
• Financial advice cover: you or your policy's beneficiaries can get financial advice (up to a limit) if the insurer pays out the sum assured.

Tip: Keep your policy schedule in a safe place alongside your will. Let your family know you have a policy.

Life insurance premiums can be structured in different ways:

• Yearly stepped premiums increase each year in line with your age.
• Stepped term premiums increase by a set amount after a fixed period of time (for example, 5% after five years).
• Level term premiums are fixed for a set period (for example, 10 years or until the age of 80). Typically, the premiums start out more expensive than yearly stepped premiums, but they may eventually prove cheaper as they don’t increase year-on-year.
• Premium freeze options decrease your sum assured bit-by-bit rather than increasing your premiums.

If you’re interested in yearly stepped premiums, before signing up ask your insurer to give you a schedule of premiums for the next 5 or 10 years. While the schedule isn’t guaranteed, it’ll give you an indication of the amount you’ll pay over time. You can use the schedule to compare yearly stepped premiums against level term premiums for the same policy.

When you take out life insurance, your insurer relies on information you provide to calculate your premiums and the terms of your cover. You have a duty to disclose material facts that would influence the judgement of a prudent insurer. Material facts may relate to your age, your medical history, and whether you smoke.

If you understate your age, your insurer is entitled to reduce its liability to reflect the lower premiums you paid. If you fail to disclose other material facts, your insurer can alter the terms of your cover, cancel a benefit or “avoid” (cancel) your policy entirely. Your premiums may not be refunded if your policy’s avoided.

The upshot is you need to be careful when applying for, or renewing, your life insurance.

Here's our advice for before and after you have life insurance.

• Shopping for cover: get at least 3 quotes. Premiums can differ by hundreds of dollars. Ensure any pre-existing medical conditions are covered.
• Ask your insurer if there's anything in the policy you're unsure about, and get them to explain it to you. Make sure you do this before you sign.
• When you have insurance: keep the policy in a safe place - where your will is kept, or with your lawyer - and let your partner or family members know about it.
• Every few years, review how much cover you need, particularly after major life changes such as marriage or divorce, having children, or children leaving home and becoming independent.
• If you are changing insurers, don't cancel your old cover until you have been confirmed as a customer of the new insurer.