Life Cover provides a lump sum on your death or the diagnosis of a terminal illness – providing peace of mind for you and money for your family when they need it most. Depending on the way in which you structure your life cover policy, your estate or nominated beneficiaries may possibly receive the proceeds (restrictions may apply based on ownership). If you are diagnosed as terminally ill then payment of the lump sum can possibly be made prior to death. Life cover depends on your individual circumstances. As a general rule you should aim to have enough cover to pay all large debts and provide your family or other dependents with a lump sum that can be invested to provide an income and replace lost earnings.
Premiums are either stepped or level. Stepped premiums are comparatively cheap for the young but increase with age. This is because they are calculated on age-based mortality (death) statistics (i.e. in any one year the older the individual is the more likely they will die). Stepped premiums are good if the cover is needed for a small number of years only. Level premiums are averaged over the lifetime of the policy, in the early years the amounts paid will be greater than stepped premiums for the same year, but in the latter years the amount payable will be less.
How it works?
Life insurance can either be held in your own name or held within your superannuation fund.
Owning a life insurance policy in your own name, means that premiums are funded from you, out of pocket, premiums are not tax deductible and proceeds are given as a lump sum and tax free. In the event you pass away, the benefits from your life cover policy are paid to the beneficiary you have nominated or to your estate.
By holding your life insurance policy inside your superannuation fund, you minimise your out of pocket costs by having premiums paid from your superannuation fund, premiums are also tax deductible to your superannuation fund. However, holding your insurance policy inside your super fund can reduce the balance of your superannuation account, which means you need to ensure your super contributions are enough to fund your premiums as well as allow your super balance to grow. There may also be restrictions on who can be nominated as a beneficiary and tax may be payable depending on how the benefit is paid (lump sum or pension), who the beneficiary is and the age of the beneficiary.
How to apply for life insurance and who can set it up?
Constructing an effective insurance plan requires a detailed analysis of the client’s current situation and their future goals and objectives. A financial adviser can assist you with determining how much you may need for life cover based on these considerations:
- Age and state of health
- Family – number and ages of dependants
- Income and expenditure
- Assets and Liabilities
- Liquidity needs
- Taxation position
- Lifestyle requirements
- Future goals and objectives