Why children are a trigger for life insurance
So you've had a baby. Congratulations on the latest addition to your family.
In financial planning terms, having children is a trigger for checking and updating your level of life insurance. It's not about tempting fate. It's much like insuring your car and your home and contents every year. That is, it’s about protecting your family's lifestyle.
No-one wants to think about the worst happening but it's a big relief to know that if fate was unkind to your family, you will still be financially secure.
So it's as simple as asking yourself what would happen if the main breadwinner in your family died prematurely or was sick or injured for a long period and was unable to work? Who would pay the mortgage, living expenses, car running costs and holidays? And, looking ahead, who would pay for your baby's education?
At the very least, you need enough life insurance cover to pay out your family's mortgage. Ideally, you would also insure to a level that would give you an amount of money large enough to generate an annual income that would pay a substantial portion of your family's future living costs including education, living expenses and so on.
While almost all working Australians have some level of automatic life insurance cover within their superannuation, most don’t have enough cover.
Independent actuarial consulting firm Rice Warner Actuaries estimates that life insurance cover within super is only 20% of what is needed on average. Rice Warner recommends taking out life insurance cover equal to the level of 10 times (annual) earnings.
So where do you begin? As a starting point, find out what your partner's automatic level of life insurance cover is in their super fund. This information would usually be found on their most recent super fund annual statement or the materials that accompany it. The odds are the automatic level of cover will be inadequate for your family’s needs.
Next, have a chat to your partner about upping their level of life insurance. There are several ways to do this including buying extra units of insurance in your super fund, buying a policy direct through a life insurance company or via a financial planner.
While you are at it, check your own level of life insurance cover in your super fund. You can call and speak to someone at your fund if you're in doubt. It's your money and it's empowering to know where you stand should the worst happen to either of you.
That's your life insurance covered.
Now, what would happen if the main breadwinner in your family got sick or injured and couldn’t work for a long period?
Life insurance works if someone dies a premature death and has debt and dependents. However, it won't work for illness or injury where the sufferer does not die but is off work for an extended period.
As a rule of thumb, most people don't have the financial means to maintain their family's lifestyle for longer than three months. This is where income protection comes in. Income protection insurance (also called salary continuance) can cover up to 75% of an individual's gross income if they become ill or injured.
Again, you can check to see if the main breadwinner's super fund offers it (most don't offer automatic cover for this type but many are starting to offer it as an option). Alternatively, consider seeing a financial planner to shop around for a policy on your behalf. This may be valuable as policies have different wordings. Income protection premiums are also tax deductible.
Other insurances include Total and Permanent Disability (TPD) insurance which is often attached to a life insurance policy. Generally, you can claim on this if you are terminally ill or catastrophically injured.
Finally, there's trauma insurance, which pays a lump sum in response to diagnosis of a specified medical event such as cancer. The money could be used to pay medical expenses, for the modification of a house or even a holiday to help the insured person recover.
So there are a couple of things to think about but the important thing to remember is sorting out your life insurance doesn't need to be complicated or depressing. Once you've got it covered, you'll be left with a great feeling of knowing your family's financial future is secure regardless of what curve balls are thrown your way.
For more information about protecting your family, visit www.lifewise.org.au.