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Last Updated on 15 November 2019

Life Insurance: Luxury or Necessity?


Key Points
  • If there is anyone in your life who depends on you financially, or any outstanding debts, you might want to consider life insurance.
  • If you have accessible savings and no debt, then it may reduce the level of cover you need.
  • Young, single people with no debts or dependents may not need life insurance at this stage.

 

Does everyone need life insurance?

Is it necessary to have life insurance? Life insurance can seem like a luxury purchase, especially if your budget is tight. It’s tough to see the benefits when you are alive and well, wondering why you’re paying a monthly premium for something you’re not using.

If you’re single and debt-free with no dependents, your life insurance needs will be different than someone who has a family or a mortgage. Ultimately, it’s a decision that will depend on your personal circumstances.

Life insurance case study

Before you cancel your life insurance—which could become more expensive to purchase again in future—there are some questions you should ask yourself.

We’ll go through these questions in this guide, so you can assess whether or not you need life insurance, and if so, how much you need. We’ll also give you some information on finding competitive prices on life cover.

But first, let’s take a look at what life insurance is and how it can help.

What is life insurance?

Put simply, life insurance is a financial security plan. When you purchase life cover, you’re buying peace of mind for your family’s future, even if nothing happens to you. If you love the life you’re living and all is going well, that’s a great reason to secure a policy: to protect the lifestyle you and your family love.

Life insurance can pay a lump sum to your beneficiaries if you die or are diagnosed with a terminal illness. Some types of life cover also pay a benefit to you as the policyholder if you become seriously ill or injured.

Types of life insurance

These benefits are intended to replace the policyholder’s lost income, and can be used to cover a range of expenses, such as:

  • Mortgage repayments
  • Education costs
  • Childcare
  • Other insurance premiums (health, car, home, etc)
  • Food bills
  • Utility bills
  • Funeral expenses
  • Personal loan or credit card debt

Without money to pay the bills, a family’s situation can change very quickly. It could mean major lifestyle changes, like selling the family home or changing schools; choices that are hard to make, especially when dealing with the loss of a loved one.

Is it necessary to have life insurance?

We’ve mentioned that for anyone with financial dependents, life insurance is not a luxury; for many, it’s a necessity. However, there are many different family structures, so each financial situation is different. Here are some questions you can ask to determine your need for life insurance.

Do I have dependents?

A dependent is a person who depends on your income to survive. You may have one dependent, multiple dependents, or no dependents. You may have dependents for an indefinite or finite period of time. Again, each person’s situation is different.

If someone relies on your income to maintain their lifestyle, then you have a financial dependent. Here are some of the people that may be a dependent.

List of financial dependents

In most cases, if you have a financial dependent then you need life insurance. However, if your income is not their only or primary means of support, then you may not need it.

Carefully consider your financial situation and that of your dependents when assessing your need for life insurance.

Am I the sole or major financial support for a dependent?

If your income provides the major financial support for a dependent, then life insurance is not a luxury for you. This is especially true if you are still working and unlikely to retire any time soon.

If you’re part of a couple, you may be in a position where your spouse could shoulder the financial responsibility in the event of your death or illness. Just remember that this is often easier said than done. It puts enormous pressure on a surviving spouse to maintain an income, plus manage the emotional upheaval that comes with losing you.

In some cases, your spouse may depend on your income to manage their lifestyle, even if there are no other dependents in the picture.

Is it necessary to have life insurance? When your income is a major source of support for someone that you love, the answer is usually yes.

Do I have outstanding debts?

Even if you don’t have financial dependents, debt is a good reason to have life cover. If you take out enough cover to satisfy any outstanding debts—like a mortgage or credit card—then they won’t fall to your next of kin if something happens to you.

Life cover is a way to make sure you’re managing your own financial responsibilities, even if you pass away or become seriously ill.

Do I have accessible savings (and is it enough)?

If you’ve got a decent chunk of money in savings, and you’re able to access it relatively quickly, then you may not need life cover. But how much is enough? That depends on your individual situation.

As a benchmark, ASIC suggests that average income earners need at least 67% of their income before retiring to maintain their standard of living.

The Association of Superannuation Funds of Australia (ASFA) has estimated that a couple living a comfortable lifestyle will need a lump sum of $640,000 to sustain their lifestyle after retirement.

The table below gives you an idea of how much you might need in super after retirement, which can give you an idea of how much you might need in savings to maintain your current lifestyle.

The table assumes you own your own home.

Retirement savings

These figures only serve to give you an idea of how much is ‘enough.’ It’s also important to think about how easy it is to access those savings, or how easy it will be for your dependents to access those savings in the event of your death.

If you have a substantial amount of savings, that may be when life insurance is not necessary. For most Australians, life insurance acts as an essential financial supplement for any savings that are in place.

How much life insurance do I need?

There’s no magic formula for calculating how much life insurance you need, which is why it helps to talk to a financial adviser about your particular situation.

As a starting point, take stock of your current debts, expenses, and assets. The purpose of this exercise is to figure out how much money your loved ones would need to cover the loss of your income.

Make a list of your debts, which could include the mortgage, credit card debt, or other loans. Then calculate how much your family needs to cover basic expenses, like bills, transport, food, and education over a period of time. Add these numbers together, then subtract any savings.

The final figure can give you a rough idea of how much life cover is appropriate for your situation. However, the number will vary depending on factors like how many years the benefit needs to cover and your living situation.

Life insurance - how much cover do I need

Finding a good deal on life insurance

Your life insurance premiums are based on the level of risk you present to an insurer. Someone who is young and reasonably healthy presents less risk, so their insurance premiums are likely to be lower.

Someone who is taking out a higher level of cover, has a dangerous job, or smokes may present more risk. In this case your premiums may be higher.

Life insurance premiums are usually based on:

  • Age
  • Health
  • Smoking status
  • Length of time for the policy
  • Lifestyle
  • Occupation

The good news is that life insurance is a competitive industry. If you shop around, you will quickly see that there is a wide range of price tags on life insurance. To find a balance between the premium you pay and the cover you want, compare your options.

If you buy the first life insurance policy you come across, you could be paying too much. Save yourself time by using our comparison tool, which lets you compare prices from a panel of insurers.

You’ll get a quick snapshot of prices, along with support from one of our qualified life insurance advisers. Get started today—you could have a policy in place sooner than you think.

Still have questions? Let's talk!

Confused? Not sure if this applies to your situation? Phone us on 1300 904 624 for some free, no obligation advice.

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