It’s a question I hear often.
However the more productive question to ask yourself is whether you can afford not to have it.
Or to put it another way, what would your world look like if the worst was to happen to someone in your family?
I know you don’t like to think about it – but let’s do just that….just for a minute.
You insure your house, your business, your car, your pet and most of us even insure our iPhone! Some of us even accept that the costs of medical treatment are a financial risk to us and opt to take our elective private health insurance.
But the majority of us ignore our most valuable asset; our ability to generate an income.
Yet you rely on your income and / or that of your partner to:
- Fund your living expenses
- Pay off your mortgage
- Invest for the future
- Create wealth for your family
As a result, for the majority of us, our financial health & happiness is reliant on our ability to generate an income. So if something unfortunate happens to you or your partner, without a plan B, this can leave you in a very difficult position.
Life insurance is a solution.
It’s a solution to the financial difficulties that are often experienced as a result of illness, injury or (at worst) the death of someone in your family. Put simply, it provides the financial means to preserve your and your family’s way of life following any of these events.
We don’t like to think about worst case scenarios but taking some time to consider the risks and having a plan B should the worst happen just makes financial sense.
A report by Zurich Australia released in 2014 found that 38% of Australian’s could survive less than one month before needing to sell assets in order to survive because of illness or injury.
A further 58% of respondents found that they could survive for no more than 3 months as a result of illness or injury. You can read the full report here.
These statistics aren’t surprising given we also have one of the highest levels of personal debt per capital in the world.
Despite a widely accepted discourse that Australia is an expensive place to live in comparison to other developed countries and that our housing is hellishly expensive with some of the highest average mortgage debts in the developed world, people immediately initiate their defences when the topic of life insurance comes up.
There is a marked disconnect between people’s perception of the cost of living vs how they expect to meet that cost in the event of illness, injury or death.
They accept that life is expensive, but there is an assumption that some combination of family, friends and potential employer or government assistance will meet these expenses eliminating the need for a personal solution like life insurance.
But family will look after us if anything were to happen….
Whilst this may be the case over the shorter term, it is your financial needs over the longer term that are unlikely to be met by this kind of assistance.
Family and friends are limited by the own financial means in terms of what they can provide and reliance on government support over the long term is unlikely to prove sufficient.
There is a prevailing attitude amongst Australian’s generally that “she’ll be right” which carries across into the concept of insurance.
Here’s the reality
However, if we look at the reality of the impact of a sickness, injury or death in the family on earning capacity alone and what this would likely mean for the average family it’s hard to be as dismissive.
If you are a stay at home parent, re-entering the workforce takes time and may involve some period of re-training. If you have spent some time out of the workforce raising a family it is likely you will re-enter paid employment at a position (and pay grade) lower than when you left at least initially and it could take several years to work your way back to a more desirable income level.
If you work part time, transitioning to a full time role is not likely to happen overnight and may not even be an option in your current position. Even if you are working full time, you still need to consider the additional costs associated with childcare and assistance with home duties if your partner was responsible for those duties.
Then there’s the loss of any part time earnings your partner was contributing to the household which was helping to paying down debt, paying for family holidays or was snuffled away for your retirement.
It’s cheaper than you think
I do understand the financial realities of the common household however.
There are only so many expenses we can support and one of the common objections to having life insurance is the perceived cost.
It may surprise you to know however that based on average rates of insurers across Australia, the average monthly premiums for $500,000 of death cover for a 30 year old man is $30 a month and for a 30 year old female is $25 a month.
Now these are average rates based on age and sum insured only and don’t take into account other factors which will impact a personal premium like pre-existing medical conditions and general health like smoking and drinking habits.
But you get the general idea. For a healthy 30 year old female, half a million dollars of death cover costs you less than a coffee a day each month.
My partner doesn’t like talking about it
Most of us find talking about illness and death difficult which is another common reason why life insurance (along with estate planning) usually falls way down the list in terms of financial priorities.
To help with the conversation, try removing the emotion from the topic and go back to the original question of this post.
What would the reality of your financial situation look like if something were to happen to one of you and then work out if a life insurance policy is a suitable solution for you.
Skeptical about life insurance companies?
Some that believe insurance companies don’t pay. There have been some well publicised cases where claimants have been denied the benefits under their policy by insurers citing they do not meet policy definitions etc.
This type of issue usually arises only with policies that pay living benefits like income protection (to replace lost income as a result of illness or injury) or trauma insurance (a lump sum to help with medical expenses as a result of a trauma like heart attack or cancer).
These cases are rare and usually involve a technicality which is argued in the media and settled before court as a result.
This is a risk that is not confined to life insurance however.
Do you debate whether to take out comprehensive car insurance on your vehicle believing that the insurer will deny a claim in the event of an accident?
Or what about home & contents insurance? Do you not take the cover because you doubt the insurer will write you a check in the event your home is broken into?
With all insurance policies, there is a claims process to be followed once an insurable event has occurred and a policy is claimed on. Yes there are greater requirements to be evidenced under life insurance policies than your car insurance, but we are talking about significant amounts of money.
So do you need it?
Life insurance is a valuable solution to unfortunate events that have an impact on your family’s finances.
If it is the right solution for you, it can afford your family peace of mind and allow you to focus on your family during these stressful times and not worry about your finances.
These decisions are personal ones though; there is no right or wrong answer so long as you are aware of the facts, have analysed the potential impact of your decision and made appropriate plans either way to deal with the outcome.