Special Communique - Death cover 101*
Death insurance cover pays a lump sum to your beneficiaries or estate in the event of your death or terminal illness. Allows you to pay off any existing debts, cover living expenses for your dependants, or provide the financial support you’d like to give them in your absence.
It may be the simplest form of life insurance, but Death cover is undoubtedly one of the most important because it helps you provide for your debts and can assist in securing the financial future of your dependants.
When you are considering Death cover, there are three key things you need to understand, so you know what will happen at claim time:
How much you are covered for?
Who do I want the claim proceeds to be paid to?
How your cover is structured? – linked or stand-alone
1. How much you are covered for?
It might sound obvious, but you need to think about the reasons you take out Death cover when you apply for it.
You might think “$1 million should be enough” – but have you thought about how much money would really be needed to replace your income, support your family, and educate your children etc?
The Australian Securities and Investments Commission (ASIC) has developed a Life insurance calculator that can help. But the best way to find out how much cover you need is to talk to your AFRM adviser.
Just as importantly, your AFRM adviser can help you adjust this figure over time as your debts reduce or your children become less financially dependent. That way you are not paying for cover you no longer need.
2. Who do I want the claim proceeds to be paid to?
When a Death cover benefit is paid, it is generally paid to the owner of the policy or a nominated beneficiary. In many cases the policy owner will be your spouse or your estate. But what if your policy is owned inside super?
In this case, the policy owner is the trustee of the super fund – meaning they receive your benefit from the insurer. The trustee will then pay your benefit to the beneficiary(ies) you have nominated, or your estate.
What you need to know about Death cover inside in super is that there are different rules around how benefits can be paid, and how they are taxed, so it is best to seek financial and tax advice specific to your situation.
The same can be said for business owners. There are specific Death cover strategies you can use to protect yourself or your business.
You may also want to consider the best way to support your beneficiaries. For example, you may want your Death cover benefit to be paid partly as a lump sum and partly as ongoing payments – which could help your loved ones take care of immediate expenses (e.g. pay down debt) and ongoing living costs.
3. How your policy is structured – linked or stand-alone?
Death cover may be purchased as a stand-alone policy or as a ‘linked policy’ that is connected to Total and Permanent Disability (TPD) cover or trauma cover. Linking policies reduces your premium, but there are implications at claim time.
Say you have a $1 million Death cover policy linked to a $500,000 TPD cover policy. If you make a successful claim on your TPD cover, your Death cover benefit will reduce by the $500,000 paid out.
Depending on your situation you may be eligible to buy back this extra Death cover at some point, but it is important to note that your Death cover is significantly reduced in the meantime.
Did you know?
Did you know that the Australian Prudential Regulation Authority’s (APRA) latest Life Insurance Claims and Disputes Statistics report for 1 January 2020 to 31 December 2020 confirms that clients who get advice on buying life insurance products are better off at claim time than people who do not get advice on their life insurance purchases.
Claims relating to clients who had the benefit of advice when buying their Death cover were accepted 96 per cent of the time compared with 90 per cent for those clients without advice.
APRA’s report states: “Generally, Individual Advised business shows higher admittance rates than Individual Non-Advised for the same cover type. This could be due to the policyholder having clearer expectations up front of what is covered by the product, or (related to the previous point) the adviser discouraging the policyholder from lodging a claim that is not covered by the policy.”
Want to know more?
There are also other important aspects to consider. The primary one being whether to use Superannuation (or not) to pay for the life insurance policy.
Depending upon the answers to the questions outlined above, we can help you determine the best option to suit your circumstances.
If you would like to discuss any of the content in this article and how it may apply to you, please contact your AFRM adviser direct or email email@example.com.
* Please note, the information in this document has been prepared by Australian Financial Risk Management Pty Ltd (AFRM) ABN 21 001 696 868. AFRM hold an Australian Financial Services License (AFSL) 237186. The information is for general purposes only and has been prepared without taking account of your objectives, financial situation or needs. AFRM recommends that you seek professional advice before acting on any information contained within this document.