Guest post: A family’s guide to choosing life insurance when on a tight budget

A family's guide to choosing life insurance when on a tight budget

This post is sponsored by Life Insurance Comparison

Living on one income can be tough for a family, but what would be even tougher is losing that income entirely.

It’s the reason why my husband and I decided to seek out life insurance to ensure our family is covered in the event that something awful happens, like illness, disability or death.

While it may sound morbid, my husband always says he feels better knowing that his girls will be looked after financially if something should happen to him … one less stress at what would be a time of great sadness and strain for our family.

But there are so many other options out there and it’s really hard to know where to start. We had plenty of questions on our mind such as: What type of insurance do we need? How much should we be covered for? Who should be covered? How do I ensure any claims will not be rejected? Is it best to have a medical check completed prior to taking out the policy?

See, so many questions! So I asked Sally from Life Insurance Comparison to provide a quick guide to help families choose the right life insurance for them and what to look out for.


{Guest post} Why you need life insurance on a tight budget (even when you have other insurance products)

When you’re on a tight budget, it’s not easy to find extra room for life insurance – especially if you already have other types of cover such as home, car and/or health insurance. Many families don’t realise how invaluable life insurance can be if the policyholder dies or is unable to work due to an accident, illness or disability.

Life insurance can provide a form of income that helps to pay bills and meet other outgoings if the worst were to happen. If you don’t have savings to fall back on, this could be the difference that stops you from experiencing financial difficulties if some or all of your family’s income disappears due to unfortunate circumstances.

How does life insurance work?

There are several types of life insurance, which offer differing benefits:

  • Term Life Insurance: When many people think of life insurance, this will often be the type of cover that first comes to mind as it is probably the most well known option. It pays a lump sum to beneficiaries if the policyholder dies or is diagnosed with a terminal illness.
  • Income Protection Insurance: This type of life insurance will pay up 75 per cent of your income per month if the policyholder is unable to work due to illness or an accident. This will either last for the duration of the benefit period  (the length of time that you choose for the policy to pay out for) or until it is possible to return to work.
  • Total and Permanent Disability (TPD) Insurance: TPD cover will pay a lump sum if the policyholder becomes permanently disabled and cannot work because of this.
  • Trauma/Critical Illness Insurance: This type of life insurance will pay a lump sum if the policyholder is diagnosed with one of the illnesses covered in the policy. This often includes heart attack, cancer and stroke but the conditions covered can vary between insurers.

How much life insurance to buy

It can be confusing to know how much life insurance to buy and many people unfortunately end up with too little, especially if they are relying solely on life insurance provided through their superannuation fund. This can be devastating for families who need to make a claim and find that they won’t receive enough income to see them through.

To work out how much life insurance cover you will realistically need, think carefully about how much you spend on regular outgoings such as bills, groceries, rent or mortgage payments, debts, education and childcare. Don’t forget to factor future costs into this too.

If the worst happens, you may need to ensure that income from life insurance lasts for many years and it can be overwhelming to arrive at a figure that will take as much of your future expenses into account as possible, without leaving you underinsured if you need to rely on this income. It’s often recommended that you aim for at least ten times your current household income for general life insurance but while this sounds like a lot of money, it could still fall short and you may prefer to have up to twenty times this amount.

For critical illness insurance, premiums are usually higher due to the fact that many people do unfortunately suffer from major conditions. The costs can therefore mean that you are more limited in terms of the amount of cover that you can afford to buy but it’s wise to go for something that is around two to three times more than your current household income.

A lot will depend on your budget as a greater amount of cover will obviously mean bigger premiums. In a nutshell, you’ll want to buy as much life insurance cover as you can afford to so that you won’t get any nasty surprises if your payment(s) doesn’t stretch far enough for your needs.

If your circumstances change, you may need to review the amount of cover that you have. A new baby, a house move, retirement or change in relationship status can all impact on your needs.

Who should be covered by life insurance?

Many families only look to make sure that the main earner in the family is covered by life insurance but it makes sense to also protect part time earners and even stay at home parents. Their contribution to taking care of the household is often overlooked, especially in terms of what it would cost to hire people to do housework tasks instead.

Does medical history and lifestyle matter?

Whereas health insurance is community rated and your medical history does not make any difference to your ability to get cover or the price of it, this is not the case for life insurance. You won’t necessarily be excluded from buying life insurance but you can expect to pay more for your premiums if your health and/or lifestyle means that you are more likely to make a claim. As well as health, factors such as being overweight, smoking and having a high risk job can all have an effect on your cover.

It is possible to buy policies that require no medical underwriting but this is a bit of a grey area and it is not always obvious as to what is and isn’t covered. There is the possibility that any claims relating to pre-existing conditions could be rejected, for example.

Policies that are medically underwritten will ask for detailed information about your health and medical history and will usually exclude pre-existing conditions.

Reducing the risk of claims not being paid out

It’s important to be completely honest when you first apply for life insurance cover as this can make any claims invalid. This would negate the whole point of having life insurance to protect your family, if the policy were to not pay out at claim time due to you providing inaccurate information when you initially arranged cover.

Most policies will have exclusions for which they will not pay out so it’s important to be aware of what is included in the small print. It’s common for exclusions to include suicide, drug and alcohol abuse, and dangerous activities but there could be others based on your health and lifestyle.

For more information on life insurance and to compare policies, visit Life Insurance Comparison at www.lifeinsurancecomparison.com.au

Do you have life insurance? Does it bring you peace of mind?

11 thoughts on “Guest post: A family’s guide to choosing life insurance when on a tight budget

  1. That’s not at all uncommon, hugzillablog! Many people start to think about the importance of life insurance when they have a family (although it can come into its own before this, when you get married, take on a mortgage etc).

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