RISK INSURANCE GUIDE

Reviewing the policy

Who gets the benefit?

Who uses life cover?

How to hold your life cover

Chapter 2 - Life cover

As the name suggests, life cover is an insurance policy that pays an amount to beneficiaries if the insured person dies.

 

The most common form of life cover is term life insurance. Term life insurance is an insurance policy that pays an agreed benefit in the event that the insured person dies or becomes terminally ill. The maximum age at which the insurer will continue to insure the policy holder varies, but is typically pegged at age 65.

 

Most term life policies will pay a benefit in the event that a person is diagnosed with a terminal illness and has less than 12 months to live. Some policies allow for part of the benefit to be paid in such a circumstance; other policies allow the entire benefit to be paid.

 

The word ‘term’ in the name ‘term life insurance’ indicates that the insurance policy only lasts for a set period (‘the term’ of the policy. This period is usually a year. In order for the policy to continue beyond the end of the insurance period, the client needs to ‘renew’ the policy. This is usually done each year.

Renewing the policy

 

Most policies are guaranteed renewable. This means that the insurer must agree to renew the policy each year regardless of any changes in their health status. This means that even if an insured person becomes ill, the insurer is obliged to keep renewing the policy. As long as the person’s health changed after they first commenced, the insurer must renew the policy.

 

Term life insurance is usually taken out by people with financial dependants who would suffer financially if the insured person died. For example, parents with dependent children typically insure their lives so that their children are looked after financially if the parent dies.

Who gets the benefit?

 

Most term life policies allow the policy holder to nominate the person(s) to whom payment should be made in the event of their death. If no nomination is made, then the insurer typically has discretion as to whom the payment should be made. Usually, the insurer will pay the benefit to the deceased’s estate, in which case the deceased’s executor will have the responsibility of distributing the money in accordance with the deceased’s will.

Who uses Life Cover?

 

People who normally should take out life cover:

  • Mums and dads still raising their children;

  • Potential mums and dads who are trying to, or may have already become, pregnant;

  • Husbands or wives (married or de facto) whose partner relies on their income; and/or

  • Anyone else with financial dependants.

How to hold your life cover

 

Life cover can be held either inside or outside of superannuation. In your own hands, the premium is not usually tax deductible. When it is held within superannuation, the premium is often effectively tax deductible. When paying using superannuation, you can either use existing benefits or, if allowable, make contributions to a particular fund so that the fund can then purchase the life cover for you.

When you use superannuation, you need to ensure that you have lodged a binding death benefit nomination with the fund, so that the trustees know where you want the benefit to be paid. You also need to remember that using superannuation to pay for life cover will reduce your superannuation balance (unless you reimburse the fund via increased contributions). If you can use super to effectively make your premiums deductible, however, the total amount you pay will be reduced, which means the reduction in your super balance will be more than offset by you having more wealth available elsewhere. If you don’t spend the tax saving, you will end up with more money.

More information

 

To learn more about Life Cover, please visit the ASIC website here.

1. key concepts in life insurance
3. Income protection insurance

 ©2016 WHOLE WEALTH

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