If we’re talking need, like food, water, shelter need; then no, you do not need life insurance.
But, if instead you’re wondering “should I get life insurance?”, then that’s a whole ‘nother kettle of fish.
No one should be forcing your hand and telling you what you do and don’t need (or should and shouldn’t have). You’re a big person; you can figure it out for yourself.
So, the purpose of this article is to help you figure it out.
What is Life Insurance?
Well, before we get going, let me quickly clarify something so that we are on the same page.
Here’s what you need to know about life insurance before we get started.
Like any industry lingo, certain terms can be confusing, interchangeable or have various definitions.
In the case of life insurance, some people refer to life insurance as a type of insurance cover that pays your family a lump sum payment if you die. Whereas, life insurances can mean an array of insurances that relate to your life, such as income protection cover, critical illness cover, etc.
So here’s what we’re going to do.
I am going to use the term life insurances to mean a variety of types of cover that you can apply for.
To keep things simple, here’s the type of life insurances we will cover:
- Death Cover
- Total and Permanent Disability (TPD) Cover
- Critical Illness (Trauma) Cover
- Income Protection Cover
These are your mainstream insurances that every person should consider.
If you suffer the event (i.e. death, disability, critical illness) as per the definition in your insurance policy, then the insurance company will pay you a benefit.
Just like house insurance, or car insurance.
What Kind Of Life Insurance Do I Need?
Here’s a basic explanation of what each type of cover provides:
Type,They Pay When,How They Pay
Death Cover,You Die,Lump Sum To Your Family
Total & Permanent Disability,You become TPD,Lump Sum to You
Trauma,You Suffer Critical Illness,Lump Sum To You
Income Protection,You Can’t Work Due To Injury Or Illness,Replacement Income To You
Should I have death cover?
Generally, if you don’t want to burden your surviving family with:
- Funeral expenses
- A residual mortgage/debt if you die;
- General living expenses that your family will incur once you are gone (for x amount of years); and/or
- Education expenses for your children;
Then you should consider applying for death cover.
How Much Death Cover Should I Have?
Quite simply, add up how much you would need for each of the items above (and any other things you can think of) and there’s your answer. If it’s too expensive for your budget, then you may need to reduce the ‘ideal’ amount of money you would like to provide to you family in the event of your death in each of the instances above.
You should also take into account any assets that could be sold or superannuation that would be paid to your dependents if you were to die.
Always ask yourself this question: “If I had passed away yesterday, what financial position would I be comfortable leaving my family in, and do I need insurance to help achieve this?”
Do I Need Total and Permanent Disability Cover?
If you suffer a Total and Permanent Disability (e.g. paraplegic, quadriplegic, loss of limbs, loss of sight, mental illnesses) and would like to be provided with a lump sum to:
- Eliminate or reduce debt;
- Cover the cost of modifications to your car/home/office;
- Replace some or all of your income that you will likely no longer be earning;
- Cover potential medical/rehabilitation costs or the cost of a carer;
Then you should consider applying for TPD cover.
How Much Total and Permanent Disability Cover Should I Have?
Just like death cover, add up how much you need to cover each item above (and anything else you can think of or would like to cover) and you have your answer. If it’s too expensive for your budget, then you may need to reduce the ‘ideal’ amount of money you would like to receive for each item above in the event of you suffering a TPD.
You should take into account any assets that you may choose to sell if such an event were to occur, which could include superannuation. Also, if you have Income Protection cover (as discussed below), this can pay a replacement income to you if you are unable to work due to a TPD – generally up to 75% of your pre-disability earnings. Therefore, this replacement income can reduce the TPD cover you need, or could even continue to cover mortgage repayments, meaning you won’t necessarily need to eliminate all of your debt with a TPD payout.
Always ask yourself this question: “If I had somehow become totally and permanently disabled yesterday, what financial position would I like to be in so that my family and I wouldn’t need to stress, and do I need insurance to help achieve this?”
Should I Have Critical Illness (Trauma) Cover?
If you were to suffer a critical illness (e.g. heart attack, cancer, stroke) and would like to be provided with a lump sum to:
- Eliminate or reduce debt;
- Cover medical costs/treatment;
- Cover lost income from time off work for you/spouse;
Then you should consider applying for Critical Illness Trauma cover.
How Much Critical Illness Trauma Cover Should I Have?
Add up how much you need to cover each item above (and anything else you can think of or would like to cover) and you have your answer. If it’s too expensive, then you may need to reduce the ‘ideal’ amount of money you would like to receive for each item above in the event of you suffering a Trauma.
You should take into account any assets that you may choose to sell if such an event were to occur. Suffering a critical illness generally does not provide you with access to your superannuation.
Always ask yourself this question: “If I had been diagnosed with a critical illness yesterday, what financial position would I like to be in, how much time would I want off work and how much money would I want to help with treatment, so that my family and I wouldn’t need to stress, and do I need insurance to help achieve this?”
Do I Need Income Protection Cover?
Income Protection cover (aka salary continuance cover) provides you with a replacement income of usually up to 75% of your salary if you are unable to work due to injury or illness. There is often a waiting period before it will begin paying (anywhere from 2 weeks to 2 years) and a benefit period (anywhere between 2 years and up until age 65). If you are reliant on your income to:
- Pay the mortgage;
- Cover the bills;
- Feed the kids; and/or
- Keep your partner happy
Then you should consider applying for Income Protection cover.
How Much Income Protection Cover Should I Have?
Think of the impact losing your income would have on your family’s ability to cover your everyday expenses and savings plan. Most insurance companies will allow you to cover up to 75% of your salary and most people apply for the maximum cover. Remember, income tax needs to be paid on income protection insurance proceeds too. Generally, premiums for income protection insurance are tax deductible in Australia and will help you reduce your personal income tax.
Always ask yourself this question: “If I was unable to work how much of an income would I need so that my family could maintain our current standard of living, and do I need insurance to help achieve this?”
Do I Need Life Insurance If I am Single?
Whether you are single, stubborn, small, smart, suave, or a siamese twin is irrelevant when determining if you need life insurance. Suicidal, though, is a little different – try to hold off on that one for at least 13 months after having your application accepted; otherwise the insurance companies usually don’t pay.
No matter who you are, your need for life insurances, and whether you should buy it, all comes down to what you would like to protect at an affordable cost, based on the types of insurances shown above and what they can cover.
Do I Need Life Insurance If I Have No Dependents?
Having dependents generally increases the need for life insurances. Why? Well, because if you pass away, suffer and illness or disability, or can’t work, there are more people who are financially dependent on you. And, since the sole purpose of life insurance is to provide you and your family with a financial benefit if you suffer an insurable event, then the more people dependent on you financially will generally increase your need for insurance.
However, this is not to say that you don’t need life insurance if you have no dependents, because there may be other reasons. Remembering that life insurance doesn’t only relate to the instance where you die. Income Protection protects YOU if you can’t work; Trauma Insurance protects YOU if you suffer a critical illness and TPD protects YOU if you become permanently disabled. Each of these insurances provide a benefit to you, not your dependents.
Do you need death cover if you have no dependents?
Well, that depends. Who will pay for your funeral? Do you have a property that you would like to leave to someone, debt free? Etc. etc. You need to think of what you would like to occur when you pass away and then determine if you need insurances to assist with that.
When You Do Not Need To Purchase Life Insurance
Generally, you do not need to purchase life insurances if:
- You were to pass away and your financial dependents could comfortably be looked after because you have adequate assets that can be used to produce a continuing income or sold to cover future expenses (i.e. you are financially loaded)
- You have enough savings to cover treatment if you were to suffer a critical illness and have enough money to cover your family expenses and your partner’s time off work for a few years while you are being treated and going through recovery.
- You were to become injured and could no longer work, but it doesn’t matter because your partner earns so much money that your income was insignificant anyway, or you have stashed away piles and piles of cash under your mattress and in your backyard.
- You were to become totally and permanently disabled, possibly wheelchair bound and, not only can you not work, but you need a full time carer to help… but none of this matters financially, because you have been wiping your backside with $100 bills for years now and there’s plenty more where that came from.
So, pretty much, if you have a few mill in net assets, no debt, no-one financially dependent on your income and an external or passive income that could continue to cover your family’s expenses for the rest of your life, then you may not need insurance. However, if this does not appear to accurately reflect your financial position, then maybe you should look into personal life insurances a bit further.
Death cover, TPD cover, Critical Illness cover and Income Protection cover are the four main types of insurance cover every individual should consider. I personally have cover for all four of these. There are other types of life insurances, but if you get cover for each of these, most of you will be sorted.
Unfortunately, many of us think we are invincible; but life insurances are something we shouldn’t ignore, especially when the stress of coping with an insurable event will be difficult enough, let alone the financial stress that often accompanies it.