Do you need life insurance? What types of cover are there? We explain.
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Most people with a family or debt 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 this.
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:
As well as providing cover in the event of death, term life insurance policies usually have other built-in benefits (see our policy comparison). Five of the most common include:
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:
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. If you’re asked about your medical history, for instance, give your insurer as much information as possible and let it decide which facts are material.
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