Menu
Menu
By now, you probably realise that real life is unpredictable. Unlike the movies, few things turn out quite as we planned – for better or worse.
And particularly for those things that go into the ‘worse’ camp, this unpredictability is why it’s so important to make sure that you have a safety net. Few of us can prevent bad things from happening. Most of us can make sure that we have enough money to support us when they do.
And that’s where life insurance comes in.
As you journey through life, your life insurance needs are going to change. You will most likely have more income, more expenses, more complexity, more debt and potentially more to lose. Statistically as you age, you also have a higher risk that something serious could knock you for six.
But isn’t insurance a waste of money?
Okay, so before we get into what type of insurance and how much, if you’re like some people, you’re wondering if insurance isn’t just a waste of money. Particularly as you get into your 40s and older when the premiums are often in the thousands each year.
Here’s the secret about insurance: you should never want to need to use it. Nobody ever said “great, I’ve been diagnosed with cancer, now I can put my insurance to good use”.
You don’t buy insurance because you want it to pay out. You buy it in case you need it to. You buy it so that you have the peace of mind that if something bad happens to you – or someone in your world – you will be financially taken care of.
If you spend tens of thousands of dollars on insurance and come out with nothing, you’re a winner.
To illustrate this, we love this chart created by Colin Lalley in his blog: “Insurance genius: why life insurance isn’t a gamble, even if it never pays out”:
- Very lucky – This is the fairy tale scenario. You don’t pay for insurance, and you’re very lucky as you never need it
- Lucky – This is a positive scenario. You buy insurance and you’re lucky enough to never use it. You enjoy life not having to worry about the financial impact of something bad happen – and have the good fortune that nothing does. You outlive and out-health your insurance cover.
- Close call – This too is a positive scenario. You buy insurance – which is lucky – because you do need to use it. You are ill or injured – or you die – and you and your family have the security of a financial safety net.
- Dead – This is the worst-case scenario. You bet on not buying insurance. You are ill or injured or you die. You and/or your family are under financial strain. No one is happy with this outcome.
You don’t have control over what bad things may happen to you. You do have control over how you mitigate the financial impact of those risks.
So, what types of risks, you might ask.
Just living our everyday lives, we face innumerable risks. And it would be impossible to protect ourselves against every one of them.
It makes sense to focus on the main risks – and we suggest that you think carefully about two things:
- How likely is it that a particular “bump in the road” might happen?
- And if it did, would it overwhelm you financially?
Here are the main “bumps in the road” that could disrupt your lifestyle – and your family’s world – along with an indication of how likely they are to occur (based on claims paid by the insurers), the money matters you may want to consider, and the type of insurance that can help:
| Event | Type of insurance | Money matters | Proportion of claims |
| Dying | Life insurance | If you have family and dependents, you want to make sure that they have enough money to live their lives without being stressed-out financially. Most people like to repay at least some of the mortgage, cover the kids’ education and ensure that there’s enough ongoing income to help pay day to day expenses. Many like to make sure that their spouse have a buffer so that they can take a break from work to grieve and adjust. Some people like to set aside some money for the causes they support. | 33% |
| Serious and prolonged illness or injury that prevents you from working for a time | Income protection | If you are working and earning an income then it’s highly likely that you need income protection insurance. This is designed to replace most of your income in the event that you can’t work for an extended period – maybe months or even years. Income protection typically replaces most – 75% of your earned income – so that you can meet your day to day living expenses. Some policies will enable you to elect an additional 10% which tops up your super. It doesn’t matter if you have financial dependents, or if you own a home, this is your most essential insurance – anyone who relies on their work income to pay their expenses needs income protection. | 33% |
| Critical illness that involves serious medical intervention* | Critical illness or trauma | If you’re unlucky enough to get knocked for six by a critical illness or trauma – like cancer, heart attack or a stroke – then you will most likely need significant medical treatment. This can be very expensive. Which is where critical illness insurance comes in. It is designed to provide you with a lump sum to help you pay for your expenses. And interestingly, they don’t even have to be medical expenses – you can pay for transport to get to and from hospital, for extra care or help around the house, or even a holiday to help you rest and recover. | 23% |
| Serious and prolonged illness or injury that prevents you from working ever again | Total & permanent disability | If you are permanently prevented by illness or injury from working – and so can’t earn an income – this is where Total & Permanent Disability (TPD) kicks in. While income protection provides some income replacement for a temporary disability, TPD insurance offers a lump sum payment to help you repay debt and meet living and additional care expenses. If you have income protection, then this can help reduce the amount of TPD cover you may need. Again, with TPD it doesn’t matter if you have financial dependents, or if you own a home, this is an important insurance to ensure that you have the best chance of being looked after financially over your lifetime. | 10% |
Source: MLC and Zurich
Child trauma
We’ve talked here about your own critical illness or trauma – but sometimes it is the critical illness endured by a young child that is the most challenging, emotionally and financially. If a child is critically ill, none of your other insurances kick in. If you need to take time off work to care for a seriously ill child, you are not able to claim on your income protection – which only applies if you are seriously ill or injured. You can’t claim on your own critical illness either.
We are huge fans of child trauma for children aged 2 up to 16. While you hope you never have to claim on it, it is reasonably priced and, in the event of a child being critically ill, worth every single cent.
