Is Life Insurance a Waste of Money?
As a financial advisor, it is my fiduciary duty to ensure that my clients are in a better financial position, such as a better strategy, better investments, better products. But that’s not all.
I must also ensure that their risks are covered. That is, I must ensure that they are personally covered IF the worst should happen.
It’s just ethical to do so.
In my post on the 7 Money Mistakes that are Stalling Your Savings, I identify that one of these mistakes is not having life insurance.
There are a few reasons why people don’t get life insurance, and it’s usually to do with thinking it’s a waste of money.
But why should I pay for something that I am never likely to use?
This is most people’s gut reaction to personal insurance.
We feel fit and healthy, and the idea that we might be hit by a bus tomorrow just seems like impossibly long odds.
But, unfortunately, life insurance exists for a reason. Death visits us all eventually; sadly far too soon for some.
The ultimate tragedy is when the worst does happen, and you are completely uninsured.
There are some scary examples: here, here and here.
I could write an entire book on seeing both sides of this tragedy, and the best I can say is please, please ensure you are personally covered. Because, sadly, the worst does happen.
One of the key insights you have from being an advisor to hundreds of clients is that you end of up seeing, helping, and managing people through the very worst of times.
I’ve spoken to grown men who have wept because their insurance was granted for a life-threatening illness.
Don’t be the person that weeps because you DON’T have cover.
What is personal insurance?
Insurance for your car, phone, or house comes under the banner of general insurance. Personal insurance, as the name would suggest, means insuring you as a person.
There are four (4) main types of personal insurance.
- Life—you go outside and get hit by a bus. It’s game over for you. Life insurance will cover your family for debts, your now-missing income, sending children through school, and other associated costs.
Essentially, the money is to fill the void you where your income and earnings would have been.
- TPD (Total Permanent Disability)—this is where you go out and get hit by the bus, but it doesn’t kill you. But you aren’t in great condition either. You can’t work, and living at home will require significant alternations to your house, or you can be placed full time into a care facility.
This money can help cover income loss and medical needs.
- Income Protection—this is practically anything that stops you from working. And no, being laid off does not count. Neither does being bored with your current job.
Income protection covers things like injury, health, medical. COVID-19 could be a valid reason.
- Trauma—this is a major medical event that requires serious medical attention. Usually, that falls under the category of heart disease or cancer. But anything that would require you to receive treatment that you need.
This insurance type might even help cover medical expenses such as flying to the only location(s) that offer the appropriate medical treatment etc.
If any of these life events happened to you, could you afford to pay it out of pocket? For most people, the answer would be no.
Fully Underwritten Insurance
This type of insurance is the gold standard of personal insurance.
Underwritten means that a qualified individual, known as the ‘underwriter’, will discuss with you your current health and lifestyle predicaments.
The underwriter will ask things like:
- Do you smoke?
- Do you drink (heavily)?
- Do you currently have diabetes (or some other major medical issue)?
- Does or has anyone in your near family have, or been treated for, a major medical issue?
- Do you partake in dangerous activities (like do you race cars or skydive for sport)?
The underwriter will take all lifestyle and health responses into account and decide what the insurance company is willing to cover you for and at what cost.
The healthier you are, the lower the cost; the less healthy, the higher the cost.
So, if you answered, I am a 45-year-old heavy smoker and drinker, have diabetes and race a car over the weekends for recreation, you would have to pay more for coverage.
More than, say, a 25-year-old non-smoker, non-drinker, with zero health issues who spends the weekend knitting.
Fully underwritten means the insurance company has calculated the risk and the price you must pay for that risk.
What does that mean?
It means that if you were to claim when fully underwritten, your insurance would likely pay out successfully and quickly. The rate of payment in Australia is in the high 90%, and the payouts are usually within weeks.
Bottom line? Australia is the best place in the world for being personally insured. Take advantage!
Default Insurance
Default insurance, however? Not so much.
It’s challenging to get the exact numbers, but the success rate of default insurance is significantly lower in terms of likelihood of payout and is usually considerably smaller in amount.
It (literally) pays to be fully underwritten.
Remember…
- Check your super to see if you’re already insured. Check your statements and see how much you’re paying, what the insurance company is, and what you are covered for. Default insurance isn’t great. But it’s better than nothing!
- Get fully underwritten. You can rest in comfort; it will be for the right amount and be the right quality.
- Work with an advisor to get you covered. Your advisor works with the insurance company to make sure everything gets done quickly and adequately. No one wants to be dealing with bureaucracy while going through a claim. A financial advisor is perfect for this.
- Personal, underwritten insurance is not a waste of money.
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This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
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