Six Stones – 2. Life Insurance

Welcome (back) to our Six Stones series. Our financial adviser, Jordan, is sharing as many tips, ideas and advice for people going through a divorce as a humble blog will allow. He’s staying away from specific financial advice – it’s all general advice over here, be sure to get personal financial advice before doing anything – but we hope you find some useful information in here as you navigate through/out of your divorce.

As I’ve written previously, this is perhaps the simplest of the insurances we’re talking about. But there are some wrinkles to be aware of when you’re considering it.

How Much Do I Need?

The first point I’d like to make here is that there is a very firm difference between the amount of Life Insurance you need and how much you want.

Often, the latter will be influenced by how much it costs. But making a decision about insurance purely on cost is to choose a meal without reading the whole menu.

What am I talking about? Well, let’s return to Louise.

Hi, Louise

You’ve probably noticed that as we’ve unpacked Louise’s very specific exposure to these Big 4 risks, we’ve focused on quantifying that exposure.

This is why we do that – by putting numbers around her exposure, we can more accurately measure The Gap between your resources and your exposure.

And once we have that, we can work out how much insurance you need, which lets us work out how much it costs.

Then we can determine how much insurance you might want based on the cost, availability, etc.

Identify —> Quantify —> Need —> Cost —> Want

You can see that following this approach helps you construct the full building before deciding what to make the roof out of.

Deciding on the cost first – choosing the roof tiles before building the walls – just leaves you with a pile of roof tiles on the ground.

Now, this isn’t an argument to spend heaps and heaps on insurance.

No, what I’m saying instead is that a decision that takes into account the cost – but is also informed by your very specific and unique circumstances – is far more powerful than one based simply on cost alone.

You can see that following this approach helps you construct the full building before putting the roof on.

OK, OK, But How Much Do I Need?

To put it really simply – and taking the extravagant assumption that you’ve been calculating your own personal risk exposures on our way here – you need enough to bridge The Gap.

Definitely no more than that, and perhaps you’ll choose to take out less once you know how much it’ll cost.

Again, that’s fine – but it really should be an informed decision.

When Does It Pay (And When Doesn’t It)?

To be blunt – it pays when you die. Which is why we call Life Insurance one of the simpler types. The claim event is pretty black-or-white…

Most policies also pay out their full benefit if you’re diagnosed with a terminal illness, with two doctors declaring that you’re likely to die within 12 months.

Beyond this, there are a few times when it doesn’t pay:

  • Normally, they won’t pay if the cause of death is suicide within the first 13 months of the policy.

    It’s important to note that it’s 13 – thirteen – months, not 12. This is for tragically understandable reasons.

  • If there has been ‘non-disclosure’ on the application.

We talked about the Duty of Disclosure in our last post, but if somebody has lied on their application and received a policy that a fully-informed insurer would have otherwise rejected, their cover is as good as useless.  

  • If the cause of death was explicitly excluded under the terms of the policy.

    If, for example, an insurer had told you they won’t cover you if you should die of heart disease – they wouldn’t pay if you had a fatal heart attack.  

  • Some policies may not pay if somebody has died in the commission of a crime, or participating in an act of war, rebellion or civil unrest.

Things to Look Out For

There are a few things to be aware of when you’re looking at life insurance too:

  • There are three parties to the policy – the Owner, the Life Insured and the Beneficiary (ies).

These are important roles and it’s critical that they’re all aligned to what you want the policy to do.

  • You can hold your life insurance within your super fund.

Now, whether or not you should is a big question – and something you should seek professional advice on. Why’s it so complex?

There are quite a few consequences to consider.

For instance, if your Beneficiaries are not what’s called ‘tax dependents’, they may end up paying tax on any benefit they receive out of super. Simple as that – 15% to 32% of the balance right off the top.

Speaking of tax, you can often also receive a 15% tax credit on premiums paid via your super fund, a handy benefit.

But if the remaining 85% is eroding your superannuation then that can have serious repercussions for you in the future.

These are big questions and big decisions with big consequences – definitely seek advice on this one.

  • How sustainable is the policy?

    This one is hard to gauge, but try to put some attention towards just how likely it is that you’ll still be able to afford this policy in 5, 10 or even 20 years.

You don’t really want to be changing insurers too often, so if the cost of the policy is already a squeeze, then you probably won’t be able to maintain it for very long. Meaning you may not have it when you actually need it.

There’s no hard and fast rule, but sometimes it’s better to have less insurance for longer, than more insurance for a shorter time.

  • Also, how sustainable is the insurer. Thankfully, our regulatory structure in Australia makes it unlikely that an insurer will just go under and leave their policyholders high and dry.

But a financially unsustainable insurer poses a real risk because they will – eventually – have to increase their prices to bridge their own gap.

This is one of the reasons we’re currently seeing big, out-of-cycle increases to the premiums on policies our clients have held for years.

I know I said Life Insurance is one of the simpler policies out there, but that doesn’t mean it’s simple. There are – as with any financial decision – complexities that you should consider as you explore your options.

In saying that, given what an incredible difference it can make when you – or your family – needs it, I think it’s well and truly worth the effort.  

Our next post will be about its far-from-simple counterpart – “TPD Insurance”