Do you still have the same haircut you had when you were in school? Is your breakfast choice based on which cereal box has the coolest mascots on it? Are you still wearing your high school jumper to the gym? If your answer to any of these questions was a horrified “no!” then we’ve got news for you: there’s something important in your life that needs updating even more urgently.
Life insurance is something that too many people set and forget. Or worse, don’t look at until they’re older. Some people think that the life insurance within their superannuation will be enough, when in fact it’s usually a bare minimum of cover that needs topping up. The truth is that, from the time you have your first proper job to the end of your life, you’ve got life insurance needs – and they change just as often as your lifestyle and personal proclivities.
Contrary to popular opinion, ‘life insurance’ isn’t just death cover – it also includes coverage for other major life changes. The four main categories are:
- Income protection: gives you a monthly benefit if you cannot work due to injury or illness
- Trauma: gives you a lump sum for an injury or illness
- TPD (total and permanent disability): a lump sum if you are permanently unable to work
- Death: a lump sum for death or certified terminal illness.
The bell curve of life insurance
It can help to think of your life insurance needs like a bell curve on a graph, with level of coverage on the Y axis, and age on the X. The reason your coverage needs are higher in the middle is that that’s when your debts and responsibilities are at their peak: think mortgage payments, dependent children etc. Life insurance is about making sure you have a large enough safety net – and the size of that net does vary.
Young and single
When you’ve just started your working life, and just moved out of home, you don’t have many responsibilities – except to yourself. This means you may only need a lower level of cover. But what would happen if you were, say, injured in a car crash and couldn’t do your job for months on end? Would you really want to have to move back in with your parents or deal with Centrelink – and would that be enough to cover your credit card bills, car loan, phone bill and other expenses? Income protection could be just what you need to preserve your newfound independence.
All coupled up
Whether you’re married or in a de facto relationship, it’s natural to want to look after your partner and maintain the lifestyle you enjoy together. Combining your finances and committing to expenses together means that if something were to happen to one of you, it would have a big impact on the other. This shared risk only grows with bigger financial commitments, such as mortgages and shared investments.
At this stage of life, it’s worth considering life insurance, income protection and trauma insurance. Each will give you a different way to hedge your bets and keep you moving towards your joint financial goals.
Starting a family
As any new parent will say, everything changes when you’ve got someone completely and totally reliant on you. The thought of not being able to give your child the best of everything is almost unbearable, which is why it’s worth rethinking your life insurance before your first child is even born.
All four life insurance categories may be revisited at this stage – even if one partner is off work on extended parental leave. After all, it’s critical to consider the value of the work they do in running the house and looking after the kids – i.e. the price you’d pay to hire someone else to do the same.
An empty nest
When your kids are independent, you may be tempted to scale back your coverage. But instead, you could look at what you’re risking if your earning ability is compromised. Chances are that at this point in your life you’re at the peak of your earnings, you’ve got used to a certain lifestyle with more disposable income, and you may still have a mortgage. Would you want to have to give that up if your ability to work were compromised?
When you’re no longer working, the function of your life insurance changes. It’s not about protecting your income so you can look after someone else – or even yourself. In fact, you’ve (probably) paid off your mortgage and set up an income source from super and/or investments. Life insurance at this stage is about leaving something for your loved ones when you die, or even just making sure your funeral is paid for.