3 things to consider before getting life insurance

Almost ready to take out life insurance? Here are three key things to think about, so you can get the right type and level of cover for your lifestyle and your family.

Before you hit send on your life insurance application, there are three crucial questions to ask yourself and your financial adviser first.

Answers to these questions, as well as an overview of your debts, assets, income and family situation, will help identify the right insurance mix for you.

1. How much do I need to cover debts and big expenses?

While you’re working, you can use your income to pay off debts like your mortgage, credit card and personal loans. But think about how you or your family would handle these debts if illness or injury took away your ability to earn an income.

You don’t want to miss a loan payment or leave your family under financial stress. That could turn a tough situation into a long-term problem.

Take Sam and Kari as an example. They’re newly married and in their 30s. They’ve recently bought their first home, with a $760,000 loan. They know it’s wise to get life insurance while they’re young to protect their home and lifestyle.

With their adviser’s help, they get life insurance and TPD cover worth $960,000. This will pay off their home loan and other debts, with a bit extra for lost income should the worst happen.

They also take out income protection insurance worth 70% of each of their salaries. This means they can keep paying their mortgage and living expenses even if they can’t work due to illness or injury.

2. How much would my family need to keep their lifestyle?

If your family relies on your income, think about how they’d cope without it – either short-term or long-term. You should consider budgeting for everyday costs like bills, groceries and school fees; as well as potential increased medical costs from an accident or illness.

Look at Debra and Harry as an example. They have two young children. Harry works in construction, and Debra teaches part-time and cares for the kids. They’re paying off a $600,000 mortgage.

After buying their home, they talk to their adviser about life insurance for their children’s financial security. They get life cover worth $1.2 million – enough to maintain their lifestyle for at least six years, including their primary mortgage costs.

Because Harry’s job is high-risk and he’s the main earner, he gets $1.5 million in TPD cover and 70% income protection. They also take out trauma cover, so Harry can take unpaid leave if something happens to Debra.

With this cover, they’re at ease knowing their children will have the life they’ve built for them, no matter what happens.

3. Do I have any savings or leave to rely on?

How fast would you need financial help if you couldn't work because of injury or illness? If you work full-time, you might have sick leave or annual leave and some savings. But if you’re a casual worker or self-employed, or don’t have much saved, you’ll need a bigger safety net.

Think about Charlie. He’s a 27-year-old Primary School Teacher earning $90,000 a year. He lives alone in a rented apartment that also serves as his office. Charlie has a credit card, a car loan and is saving for a mortgage deposit.

Charlie has basic TPD cover through his super fund but can’t rely on paid leave. He knows using his savings would delay his home-buying plans.

So, with his adviser’s help, Charlie takes out income protection worth 70% of his salary – $5,250 a month. This will let him live comfortably until he can work again.