What To Consider When Looking For A Life Insurance Policy

Across all the major purchases and investments you make in life, insurance considerations tend to fall to the wayside. There’s no denying, however, that securing the right insurance policies can help safeguard not only assets like your home, but they can also help provide protection for your family in the event of your passing or your earning potential being diminished.

And that brings us to today’s topic: life insurance. Nobody loves to dwell on their own mortality, but the fact of the matter is that your family and loved ones can be safeguarded if you’ve got a contingency plan in place. But what should your life insurance policy cover, and how do you know if you’ve secured the right policy for you and your household’s unique insurance requirements?

If you’re seeking the answers to these questions and may even have some of your own, then stick with us as we provide answers to some of the most frequently asked questions when it comes to securing a life insurance policy. 

 

What type of life insurance cover will you need?

The key consideration you should make when looking into life insurance policies is simply determining what type of life insurance cover you’re most likely to need. With this knowledge on-hand, you can secure a life insurance quote with greater confidence.

Here are just some of the different types of life insurance cover you may benefit from looking into:

• Income protection insurance

This insurance cover is designed to pay an agreed-upon portion of your lost income over an agreed-upon period of time if you’re unable to work due to a disability caused by illness or injury.

• Life cover

Also referred to as ‘term life insurance’ or ‘death cover’, this insurance cover is designed to pay a lump sum to individuals listed as beneficiaries in your life cover policy when you pass away.

• Terminal illness cover

A type of life insurance cover that can be combined with life cover, terminal illness cover is designed to provide beneficiaries with an ‘early demise payout’, where insurance providers release funds prior to the policyholder’s passing as death is likely to occur during the term of that policy.

• Total and permanent disability (TPD) insurance

Unlike income protection insurance which is designed to provide repeat payments over an agreed-upon period, TPD insurance is designed to pay a lump sum if you become totally and permanently disabled due to an illness or injury.

• Trauma insurance

Also referred to as ‘critical illness insurance’ or ‘recovery insurance’, this insurance policy is designed to pay a lump sum if you suffer a critical physical illness or serious injury (i.e. cancer, major head trauma, heart conditions, strokes, etc.). 

Understanding what types of life insurance cover that your family can benefit from most (and what you can afford) can help you develop a tailored life insurance policy that best suits your unique insurance requirements.

• What’s your current financial position?

Speaking of ascertaining what you can afford, it’s important to keep in mind that life insurance policies can be costly in comparison to other types of insurance cover. And just as it’s imperative that new homeowners pick a home insurance policy that’s right for them, so too are life insurance shoppers encouraged to secure a policy that aligns with their current lifestyle and budget.

To begin, add up all your assets (including cars, houses/properties, savings accounts, superannuation, etc.) with all your liabilities (debts like mortgages, loans, etc.). Compare these with your income to determine just how much money your family would require in order to live comfortably for a duration of time if the worst were to happen to you.

Similarly, consider the cost of living in your city and whether these expenses (and your liabilities) are likely to grow in tandem with interest rates or indexation. Some insurance providers may recommend adding in a buffer zone to your estimates to ensure that your family won’t be underinsured in the event of your passing or your being unable to work due to injury or illness.

The most important thing, however, isn’t making sure that your family is adequately covered, but that your insurance premium stays sustainable for yourself and your household. Being overinsured can be just as stressful as being underinsured – especially if your current financial position requires some flexibility to better accommodate higher priorities like making your monthly mortgage repayments or making sure that your household has enough money on-hand to pay for your kids’ tuition fees, medical appointments, and other non-negotiables. 

What are your policy’s inclusions and exclusions?

With a solid understanding of what you can expect to spend and the type of life insurance cover that will be most suitable for you and your household, now is the perfect time to start shopping around with these core considerations in mind. As you start to accrue life insurance quotes from different providers, chances are you’ll also be sent over some info packs or even a Product Disclosure Statement (PDS). 

It’s important for life insurance shoppers to really engage with the structure and contents of PDS documents, as these outline all the key dates, fees, benefits, risks, and claims or complaints handling processes that relate to all of your shortlisted life insurance policies. The devil’s in the details, and really absorbing the information in PDS documents that are shared with you can help you ascertain just what’s included in your life insurance quote and attached policy, and what that quote may be exclusive of. 

For example, you may find that a cheaper quote doesn’t include trauma or TPD insurance whereas a slightly higher quote does. In these instances, adding on the additional insurance cover may end up with the cheaper policy growing in price and ultimately offering less value than the quote that was initially higher.

This is also why it’s vital for consumers to understand insurance industry lingo, and gain a working knowledge of all the different life insurance cover types and their unique inclusions. Reading through your PDS documents will also be a lot easier if you can read right through without stumbling on industry jargon like ‘beneficiary’, ‘death benefit’, or ‘TPD’. And if you’re unfamiliar with any of the jargon used in the PDS statements for your shortlisted policies, then be sure to consult with your prospective insurance provider or even a trusted legal or financial advisor for clarification. 

 

How may lifestyle and genetic factors impact your policy rates?

Just as your home insurance premium may go up if your property is in a high bushfire risk area, so too can your life insurance premium increase if you’re genetically predisposed to develop an illness. 

Lifestyle factors like existing chronic illnesses (i.e. diabetes, heart conditions, etc.) and even your professional employment and its unique risk factors can also play a role in impacting your policy’s rates. This is because life insurance providers take things like ‘high-risk activities’ into account when evaluating the safety of offering a life insurance policy to you as a customer. If you’re a professional skydiving attendant or a BMX racer and you’re defying death every day, chances are your life insurance premium is going to be a little higher than the average office worker’s. 

Age is naturally also a factor that can impact your policy rates, resulting in a higher premium or excess in the event that you do make a claim with your life insurance provider. On the plus side, having these factors to plan for can make it easier to determine what type of insurance cover you can most benefit from securing. For instance, if you do have a genetic predisposition to developing cancer or diabetes, you can preemptively secure critical illness cover alongside terminal illness cover, alleviating concerns that your family won’t be secured if you do happen to fall ill.

It’s also worth noting that some life insurance providers may even provide you with discounts for health and wellbeing initiatives (i.e. exercising regularly, or being a non-smoker). So even if your lifestyle factors do negatively impact your policy rates, your healthy habits could help you secure some savings too.

How may interest rates or indexation impact your policy rates?

Most life insurance policy providers offer two different types of models for calculating your policy premiums, these being stepped and level premiums. Stepped premiums are recalculated annually, increasing as you grow older. Contrastingly, level premiums are calculated based on your age when the cover commenced. This means that initially, your life insurance policy with a level premium may be more expensive, but the consistent pricing of your policy provides savings in the long-term when compared to the incremental increase of stepped premiums.

And given Australia’s cost of living crisis and the rising cost of insurance as a result of interest rate hikes, it’s important for consumers to secure life insurance policies that aren’t likely to be as influenced by rate hikes or even indexation. There’s a chance that stepped premiums may increase in price in accordance with interest rate hikes or indexation. And since living in Australia is already expensive enough as is, it makes sense why many consumers are opting to secure level premiums as younger policyholders rather than securing a policy with a stepped premium later down the line. 

In this regard, it helps to think of your life insurance as a seed you’ve planted. With diligent watering (in the form of financial planning), your cover can grow whilst your premium stays manageable and in alignment with your finances. 

How does your policy compare to those from other providers?

Finally, one vital component of shopping around for the best life insurance policy is actually shopping around – even if you’re 99% sure you’re going to secure your policy with a particular insurance provider. Insurance companies are equipped with whole sales divisions to provide their prospective customers with the best possible deals, so you shouldn’t hesitate to continue comparing your shortlisted policies with other providers and their own offerings. 

Thankfully, you may also be able to secure discounts on your insurance policy if you bundle your life insurance with other products. For instance, if your current home insurance provider also happens to offer life insurance policies, they may be able to provide you with a financial incentive to secure your life cover through them rather than with their competitors. It certainly never hurts to inquire – in fact, in simply asking, you may be able to secure yourself a great life insurance policy with a loyalty discount that you can reclaim over every financial year. 

So don’t be afraid to shop around, and to shop around every year! By keeping your options open, you’ll be better positioned to find the most high-value life insurance policy at the lowest cost to you. 

Still shopping for the right life insurance policy?

It’s not unusual to spend weeks to months finding the right life insurance policy to suit your needs. So our best tip is not to rush yourself and really engage with all of your shortlisted policies. Taking the time to do your due diligence can help ensure you find a policy and insurance provider that ticks all your boxes!