Life Insurance

What is life cover?

Life cover (sometimes called death cover) pays a lump sum to your nominated beneficiaries or your estate if you pass away while the policy is in force. The money can be used however your family chooses. Many people think of it as a way to clear the mortgage, cover everyday living costs for a period, and fund longer term goals such as children's education.

Life cover is one of four main types of personal insurance. The others are TPD (Total and Permanent Disablement) cover, trauma cover and income protection. Many people hold a combination, as each one responds to a different event.

Terminal illness benefit

Most life cover policies include a terminal illness benefit. If you are diagnosed with an illness that is expected to lead to death within a set period (commonly 24 months, although this varies), the policy may pay the sum insured early. This can give families choices at a very difficult time, such as clearing debts, paying for care, or spending time together without financial worry.

The exact definition, the required medical evidence and the time period differ between insurers and policies, so it is worth checking the wording in your own Product Disclosure Statement.

How much life cover do people typically consider?

There is no single right amount. The level of cover that may suit one household can be very different for another. When people work through a figure, they commonly think about:

• Debts that would ideally be cleared, such as a mortgage, car loans and credit cards
• Ongoing living costs for the family for a number of years
• Future costs such as children's schooling or university
• Funeral and estate costs
• Any existing cover already held, including cover inside super
• Savings, investments and other assets that could be drawn on

For many people aged 40 to 60, the picture has changed since they first took out cover. The mortgage may be smaller, children may be close to independence, and super balances may be larger. Each of these can change the amount of cover that makes sense. Free calculators from Moneysmart and several insurers are listed on our Resources page if you would like a starting point.

Stepped vs level premiums

The way your premium is structured has a large effect on what you pay over time. The two most common structures are stepped and level. Terms vary between insurers, but in general:

Stepped premiums

A stepped premium is recalculated at each policy anniversary based on your age at the time. It usually starts lower, but it tends to rise each year, and the increases often become steeper from your mid 40s onwards. Many people who notice their premiums climbing every year are on stepped premiums.

Level premiums

A level premium is based on your age when the policy started, rather than your current age. It usually costs more in the early years but does not rise because of age alone (it can still change because of indexation, policy fees or insurer repricing). Some people choose level premiums when they expect to hold cover for a long time.

Neither structure is right for everyone. Understanding which one you have, and how it is likely to behave over the next ten or twenty years, can help you decide whether your current arrangement still suits you.

Holding life cover inside vs outside super

Life cover can be held through your superannuation fund or in a policy held in your own name (outside super). Each approach has trade offs.

Inside super

• Premiums are paid from your super balance, which may help with cash flow
• Over time, premiums reduce the amount you have available in retirement
• Default cover levels may not reflect your personal circumstances
• Death benefits paid to some beneficiaries, such as adult children, may be taxed
• Payment is made by the super trustee, which can add steps to the process

Outside super

• Premiums are paid from your own cash flow
• Benefits are generally paid directly to the people you nominate
• You have more control over the policy and its features

Some people use a combination of both. Tax treatment depends on individual circumstances, so it can be useful to check this with your accountant or tax professional.

Why reviewing existing cover matters after 45

Your 40s and 50s are often a period of change. Incomes are higher, debts are reducing, and family responsibilities are shifting. At the same time, stepped premiums usually rise more quickly. That combination means a policy that suited you ten years ago may no longer reflect your life today.

A review can help you understand:

• Whether your current sum insured still matches your debts and family situation
• Whether you hold duplicate cover inside and outside super
• How your premiums are likely to change over the coming years
• What options may be available across a range of insurers

It is generally wise not to cancel an existing policy until any new cover has been fully accepted, as your health and circumstances may have changed since your original application. Our Insurance Review page explains the five steps we work through, and our claims support page explains how we help if you ever make a claim.

How Harbour Life Insurance can help

Michael Shagrin is a life insurance specialist with over 30 years of experience in the life insurance industry. He explains how your current cover works, compares it across a range of insurers and provides options for you to consider. There is no pressure to change anything. Our service is free to you because Harbour Life is paid by the insurers.