Tax & Insurance
Updated Dec 19, 2022
This information has been reviewed by our SMSF Mates before it was published as part of our review process.
Few other things in life are more confronting than planning for one’s death, which is one of the many reasons why many of us have never given serious thought to obtaining life insurance. The reality is it can be a vitally important decision to make, especially when your family’s livelihoods are potentially at stake.
Getting a life insurance policy is a great way to give you and your loved ones some financial peace of mind if the unthinkable happened to you and for most people in the market for a policy the cost if front of mind.
There are many other common misconceptions and myths concerning life insurance which we will discuss in this article to help you get a feel for the facts and fiction.
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Probably the most common misconception about life insurance is the cost of a policy. According to SMSF Mate research, close to 75% of people surveyed believed that obtaining life insurance was more expensive than the actual price of the policy. When people were asked what they thought the cost of a 30-year, $300,000 term life insurance policy would cost for a healthy 35-year old (non-smoker), the majority said around $500 per annum. The average price of the policy in Australia in 2020 was $200 per annum, which is significantly cheaper than what people think.
Like with most other insurances, there are a plethora of options to choose from with life insurance. Most people we speak to find term life insurance the easiest to understand and the most straightforward.
Term life insurance gives you the option to select the amount of coverage you require in dollar terms and the duration of your policy or the timeframe of which you want to be covered. You could choose say $300,000 cover with a timeframe of 15, 25, 35 years. As long as you pay your monthly premiums, your beneficiary will receive the payout in the event of which you pass away. It’s as simple as that!
There are a variety of factors which are combined to determine the cost of your life insurance policy, but it’s undoubtedly better to obtain cover when you are young and healthy as far as the price is concerned.
When we took a closer look at the numbers, a policy which costs you $40 per month when you are 35 years old, the same policy will cost you close to double that when you are 55. The price is tied to the perceived likelihood you will develop health issues the older you become. Buying a policy early in life can be the difference between getting it and not getting it, so it’s essential to think ahead.
Intuitively, most people think that if you have some kind of pre-existing medical condition, the life insurance companies won’t touch you. Fortunately, this couldn’t be further from the truth as most life insurers will insure someone with health issues, provided they are not terminal.
Of course, things like high cholesterol levels, arthritis and diabetes might mean the price of your policy will be higher, but they will certainly still be affordable for most people.
When you only have yourself to worry about, it’s easy to think there is no need for life insurance, especially if you don’t have kids or a partner to look after if you go. It’s important to consider that your folks may need assistance in their older year and let’s not forget the cost to pay for your funeral and burial or cremation costs. If you have any kind of debt, then you need to think about how this will be repaid in the unfortunate event of your passing. The last thing you would want is your family members to be burdened with your debt while trying to grieve your passing.
Few things are more important than saving for your retirement but obtaining a term life insurance policy is a prudent contingency plan for the worst-case scenario – your death! Due to life insurance being reasonably affordable, it should not impact your ability to save and invest for the future. Most young adults we spoke to said they would rather invest the money instead of purchasing an insurance policy. This plan might stack up if you can adequately invest for 20-30 years before you pass away, but we all know you might not get this luxury of time.
As we have discussed, as you get older life insurance will get more expensive, which is understandable due to the increased risk of health issues in later life. This is not to say that life insurance is unattainable when you are close to retirement age unless you have a terminal illness. You can always adjust the length of your policy to cater for the difference in goals and life expectancy compared to a young adult.
By now, we should know that age and your current health situation can play a part in what you pay for your life insurance policy. Surprisingly, there are a variety of other factors which insurers will consider when you apply for cover, which you should be aware of before obtaining a quote. Below is a list of the most unusual things which come into play when you apply for a life insurance policy.
For the most part, your credit rating is not a factor when looking at a life insurance policy like it would be with car insurance or home insurance. Bankruptcy can, however, make it harder to obtain life insurance cover if it was a recent event. Most life insurers will not offer term life insurance to someone up to two years after their bankruptcy has been discharged.
Understandably, if you have a checkered driving record, then you can expect to pay much higher premiums for life insurance. If you have been recently convicted of a serious driving offence, then it’s likely you will not be offered life insurance at all. It’s common for insurers to request a check of your driving record before providing life insurance cover above certain levels of coverage.
Driving is considered one of the riskiest activities you will undertake in your day to day life and if you are seen to be taking excessive risks while driving an insurer would have to factor this into their models when insuring you.
As you would expect, if you are working in the line of fire, so to speak, you can expect to pay more for your life insurance policy when compared to someone working in a safer environment. Emergency service employees, pilots, construction workers and security personnel might pay more in life insurance premiums when compared to a web developer or marketing professional.General Advice Warning
Ashwin is an accountant and educator based in Perth, Western Australia. He is passionate about helping family owned businesses and startups. He is one of the founders of SMSF Mate and you’ll regularly see him on our podcast!
Ashwin is a managing owner and director of Eventum Consulting, a multidisciplinary firm helping clients with finance, succession planning and their tax needs. He also served as a lecturer in taxation and small business at the Central Institute of Technology, and has worked as an accountant at a number of well-known tax specialists.
Ashwin studied a Diploma of Business Education and a Bachelor of Commerce in Financial Accounting, Managerial Accounting and Corporate Finance, both at Curtin University, WA.
Ashwin is passionate about technology, and sees it as an enabler for his clients to grow truly sustainable and profitable businesses.
You can find out more about Ashwin or connect with him on Linkedin here: https://www.linkedin.com/in/ashwin-ramdas-72442919/
Or visit his website here: https://eventum.com.au
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