Ask An Adviser - Should I Have Life Insurance?

Top answer provided by:

Jon Hosford

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Amy, you ask a great question- one that not enough young people ask themselves. As they say, "You don't need insurance... until you do". The problem with waiting until you’re older to get life insurance is that unfortunately, when you’re no longer young and healthy, life insurers know it too. Your insurer may decide to load your premium (i.e. charge you more), put exclusions on your cover (i.e. not cover you for certain events) or flat out decline your cover.

So how do you assess when is a good time to get Life Insurance? When assessing risk, you need to look at two things: likelihood and consequence. In Life Insurance, likelihood refers to how likely is it that you, a young and healthy individual, would pass away at a given point in time. Whereas consequence refers to how severe the financial impact would be on those around you if you were to pass away. Based on these two criteria, we form a risk matrix like the one seen below.



Being young and healthy only really addresses the likelihood factor (but even then only partially as accidents can happen to anyone regardless of age). Even if the likelihood of your passing is rare: if the financial impact (or consequence) is moderate or higher, then we are left with a medium, high or extreme risk which needs to be addressed. If you don’t have dependent children, debt or a partner the financial consequence of your passing may be considered minor. However, if you have someone who depends on you being alive for financial support, consider for a moment what their life would look like without you around. Perhaps they rely on you to provide care for the kids, to provide income to service the mortgage, or they may even rely on you to earn income while they look after a loved one. In any of these circumstances the consequence of your passing is more dire.

It is important to discuss the need for Life Insurance with the beneficiaries that are likely to inherit the proceeds. While it is important to note that Life Insurance can pay out early if you are diagnosed with a terminal medical condition (i.e you are told by a doctor you have less than 24 months to live), most often, it will be your loved ones who benefit from the proceeds of your policy. It may be an uncomfortable discussion to have, but the discomfort your beneficiaries will experience if you don’t have these discussions is the greater evil. They could end up footing the bill for the funeral and having to reconcile your financial affairs and so having a conversation with them about what actions they would likely take, and what areas they may feel as though they would be financially vulnerable if you were to pass away.

You may also want to consider whether the “risk” (again measured by likelihood and consequence) would be higher or lower if you suffered from an illness or injury that didn’t kill you, but required a significant amount of time off work, or cost a substantial amount of money to treat? The harsh reality is that we are often more of a financial burden to those we love if we are alive and not able to work, than if we were to die due to the extra cost of treatment and care. If you think this risk is higher for your situation, there are other covers to consider: Income Protection pays you a percentage of your monthly income if you can’t work short to medium term, Total and Permanent Disablement pays a lump sum in the event that you are never able to work ever again, and Trauma cover pays a lump sum in the event that your suffer a critical illness. These insurances, along with Life Insurance, work together to help provide a layer of protection against whatever life may throw at you.

I can share with you a real-life example of how these covers work together to protect you and your family when the unthinkable happens. I too was young and healthy when I started as a Financial Planner. I was 28 and my wife and I were working hard to make a dent in our mortgage so that we could start a family. I thought nothing of a lump on the side of my neck for about 3 months, thinking it was my glands playing up. I eventually went and got the lump checked. The devastating and costly diagnosis was thyroid cancer.

I required treatment from a surgeon in Melbourne. This meant being away from home for at least a month between the surgery, the recovery and the follow up appointment. Naturally, my wife wanted to be with me as I navigated this scary, lonely, and painful season of my life. Unfortunately, she, like so many of us, had limited carers/sick leave through her employer. My income protection ensured the mortgage was still paid, and we had an income. My Trauma insurance was able to cover the extra costs involved with travel/accommodation during treatment. It was an expensive season, and I’m so thankful that my wife and I had done a risk matrix which enabled us to insure what was important to us.

One last point to make about all these insurances is that there are different pricing formats. Some products will have a stepped premium that starts off cheap while the likelihood of you making a claim is low, but as the likelihood grows (because you are getting older) so does the premium. This may work for you. You might have a large amount of debt or, a young family at the beginning of your cover, and so the financial consequence is very high. However, as those kids leave home and the debt gets chipped away, the consequence reduces over time. Therefore, as the cost increases over time, the need for the cover may reduce and adjusting the cover regularly may keep it cost effective through the duration of the policy.

Insurers may also offer another option known as a level premium. Under this option, the premium is higher from the beginning, but doesn't increase as you get older. These policies can make life insurance a lot more cost effective later in life, when the likelihood is higher. However, they usually need to be held for 10+ years before you begin to see the benefits of your patience. Of course, the longer you leave it to lock in a level premium, the higher that premium will be.



There are so many factors to consider when it comes to insuring yourself, which is why you speak to a financial planner. A financial planner will help you to get the right advice on where you fit on the risk matrix, how much cover to hold, what type of cover you need, how long you are likely to need the cover, and as a result which pricing structure could work best for you. As they say, “Plan for the worst and hope for the best”.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Jonathan Hosford

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