When I found out I was pregnant with my first child, I remember feeling like there was a never-ending to-do list to get sorted before baby arrived, from exciting (what kind of pram do I want?) through to the very mundane (do I have enough maternity pads in my hospital bag?)
But while purchasing everything from nursery furniture to onesies, there was a very different but very important purchase my husband and I also decided to make. A few months before my son arrived, we both took out individual life insurance and income protection policies.
One of the scariest things about starting a family is the realisation that another human being is completely, 100% dependent on you. And that means financially as well. One of the many responsibilities parents have is striving to provide financial security for their family.
Before becoming parents, if something was to happen to one of us, it would have of course been horrible but financially at least, the other one would have muddled through somehow. At best, just kept working full time. At worst, the house would have to be sold.
But once you have a kid, that changes things.
My husband and I both contribute fairly equally to our household budget. If something was to happen to one of us now, the other one couldn’t simply return to full-time work to pay off the mortgage (on half the income). If they did, we’d have to put our son in childcare full time which brings with it extra costs, or alternatively, work less which of course means it would be even more of a struggle to pay the mortgage and manage all the other living expenses.
That’s why we decided to take out both life insurance and income protection. That way, if one of was no longer able to work due to injury or illness or (god forbid) passed away, it could help take care of our mortgage and there’d be more flexibility in terms of juggling work and childcare.
Why do you need to think about life insurance & income protection?
If you have a family (or are planning one), you need to make sure your loved ones would still be taken care of if something happens to you or your partner.
Would you still be able to pay the rent or the mortgage if one of you couldn’t work for an extended period of time? If you were down to one income, are you confident you could still pay the bills without having to change your kid’s lifestyle?
And long gone are the days when you only have to think about protecting dad’s income. For many families – like ours – both incomes are equally important which is why you both need to have the right level of cover.
So do I need both? What is the difference?
Income protection insurance essentially helps replace your income if you are unable to work due to injury, accident or illness (note it generally won’t cover you if you become unemployed). It can provide up to 75 per cent of your annual income so you could help meet your ongoing living expenses and is paid in regular instalments just like a normal pay check.
Life insurance is designed to help provide financial security for your loved ones in the unfortunate event of you passing away, becoming disabled or unable to work permanently due to injury, accident or illness. Unlike income protection. Most life insurance is paid out as a lump sum to help your family pay off the mortgage, assist with funeral expenses and manage costs.
Life insurance is both a specific product (term life insurance or ‘death cover’ which is paid out upon your death) and also used to refer to other products such as trauma and TPD cover. Trauma cover provides a lump sum payment to assist with the medical expenses associated with critical illnesses such as cancer or heart attacks while TPD (total and permanent disability cover) is a lump sum payment should you be permanently unable to return to work due to serious illness or injury.
You might decide that you want the peace of mind that comes from having all four products (life, income protection, TPD and trauma) or you may decide that you are comfortable having just one or two. It’s all about choosing a combination that is tailored to your individual circumstances and financial situation.
But don’t I have life insurance in my super?
Most superannuation policies do include some form of life insurance (and often TPD and trauma too) although the level of cover may not be sufficient to meet your family’s financial obligations should the unexpected happen. That’s why many people choose to take out their own, stand-alone life insurance policies rather than relying on the default level of insurance provided through their superannuation.
Income protection isn’t generally included by default in superannuation policies (although many funds do allow you to add it to your policy for an additional fee).
For myself and my husband, we looked carefully at the level of insurance included as default in our super and decided it wasn’t enough to meet our financial commitments should our income be significantly reduced. So we decided to each take out our own separate policies and removed any default insurance from our super. Our income protection premiums are fully tax deductible (helping to make them more affordable) and we opted to pay for our life insurance out of our super (even though it’s held separately to our superannuation policy).
Get help to tailor your cover
We decided stand-alone life and income protection policies was best suited to our circumstances but what is most suitable for your family’s needs may in fact be very different. That’s why it’s so important to get independent financial advice.
iSelect’s qualified life insurance advisors can help you compare insurance products from a range of Australia’s leading life insurers and help you select the policy (or combination of products) which best suits your financial circumstances.
Thinking about income protection or life insurance is not exactly what you want to be thinking about during your pregnancy bubble. But years from now, should the unexpected happen, you’ll be incredibly glad you did. And once it’s ticked off the list, you go back to getting teary in Kmart while picking out tiny newborn onsies.
by iSelect spokeswoman, Laura Crowden
This blog post is sponsored by iSelect