July 15, 2021

A man sitting and discussing about insurance policies with an insurance provider

Life is unpredictable. As much as you don’t want to think about you or your loved ones dying, it is something that you will have to prepare for eventually. You’ll also want to make sure your family is well cared for and that they have the funds necessary to manage funeral costs and other expenses.

One way to do this is to opt for a life insurance policy. What is a life insurance policy, though? And how can you select the right one for your needs? With so many life insurance providers out there, you are bound to get overwhelmed and confused.

In this article, we will discuss the different types of life insurance policies that providers offer and help you choose the right one.

A man sitting and discussing about insurance policies with an insurance provider

Understanding What Is a Life Insurance Policy 

First things first, what is a life insurance policy? In simple terms, when you get life insurance, you sign a contract. As per the contract, the insurance provider will offer an income source for your family and children along with any other dependents if you are unable to do it yourself.

A life insurance provider will guarantee a lump sum payment to the beneficiaries named in the policy. These payments are made in exchange for the premiums the policyholder paid during their lifetime. Beneficiaries can use this amount to manage important financial commitments, such as:

  • Daily living expenses
  • Rent
  • Bills
  • Car and mortgage payments
  • Education expenses
  • Funeral costs
  • Outstanding debts

Is the Super Fund Insufficient for Covering Your Family’s Needs?

As an Australian citizen, you can also count on the super fund as a source of income for your family. However, it is also important to make sure you have sufficient coverage.

As per Australian law, super fund trustees are required to provide insurance coverage to their members. The fund usually deducts premiums from your super contributions, too, making them easy to manage. ​However, you still need to find out the cover type you have.

In most cases, the level of coverage these funds offer might not match your family’s needs. However, if you have more than one super fund, you can adjust this by consolidating your funds in one place.  If you don’t, opting for a life insurance policy can help assuage your worries.

The Types of Life Insurance Policy

We have discussed what is a life insurance policy and whether super funds can provide the necessary coverage you need to live comfortably. Now, let’s take a look at the different types of life insurance policies.

A man in a white dress shirt signing documents with another man in the background

A man in a white dress shirt signing documents with another man in the background

Term Life Insurance​ 

A term life insurance policy provides financial security to beneficiaries for a fixed period. It can offer coverage for 5, 10, or 20 years. The premiums you pay usually remain the same for the coverage period you have chosen.

Once this period has passed, the insurance provider will require you to pay a higher premium. This type of insurance policy is less expensive than permanent life insurance. You can use it to replace lost potential income or meeting long-term family goals such as making college payments.

In many cases, people feel confused about the amount of coverage they need for a term life insurance policy. The best way to figure this out is by considering the type of debts you expect to pay off and the total amount you expect to borrow.

Next, you can consider the amount of money you want to leave for your family to help them meet their future requirements if you were to die. You can add these amounts and get a rough estimate of how much coverage you require.

You can also take your current and future financial requirements into account. Next, you can consider your existing assets, such as your investments, earnings, and other sources of income. Subtract your future financial requirements from this amount, and you can determine how much coverage you need.

Whole Life Insurance

Whole life insurance offers lifetime coverage and comes with a higher premium payment than term life insurance. It covers the policyholder for the duration of their life as long as they keep paying their premiums on time.

The premium payments are fixed here, and you can funnel a portion of these payments in a savings component known as the cash value. The cash value lets you use a whole life insurance policy as a source of emergency funds. You can also take out a loan against this insurance policy.

Most people use this insurance policy as an estate planning tool. It allows you to preserve your wealth, and you can later transfer it to the beneficiaries of your choice.

Universal Life Insurance

Universal life insurance offers financial protection to an individual throughout their lifetime.

These policies are flexible, and you can increase or decrease your premium and the coverage amounts offered. Despite this, a universal life insurance policy still requires you to pay a higher premium than term life insurance.

Like a whole life insurance policy, this type of insurance also has a cash value. Policyholders can access these funds without impacting the guaranteed death benefits attached to the policy. Once the insured party dies, the insurance provider will retain the remaining portion of the cash value.

Wrapping It Up

A man holding a pen and reviewing documents with a calculator and laptop on the desk

Research suggests that a standard Australian family requires an annual income of $40,000 to $60,000 to remain financially secure. However, most Australians are very underinsured. The average life insurance policy also covers less than two-thirds of what you require for basic daily expenses.

The right insurance policy can help you avoid these problems and ensure your family’s financial stability in the event something happens to you and you can no longer provide for them.

Remember, you should also consult a retirement planning expert and an insurance provider to determine your requirement and make an informed decision accordingly. Good luck!

Did you find this article useful for figuring out what is a life insurance policy? Follow Life Boss for more interesting articles on money management, health and fitness, food, fashion and beauty, and more!

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