Comparing and reviewing life insurance cover

5-minute read

What you'll learn

• When to review life insurance cover
• How to review life insurance

When to review life insurance cover

Reviewing life insurance cover is a critical part of ensuring that the policy remains aligned with the insured`s personal wishes. Below are some key events that should be considered when reviewing life insurance cover.

Major life events

Changing financial responsibilities, such as getting married, having children, buying a home, or retiring are all significant life events that may affect life insurance. These events change the financial responsibilities and may impact the need for life insurance. When these milestones are experienced, it is a good time to assess current coverage and whether it adequately provides for the insured’s family's future.

Changes in income

If income changes significantly, whether it is an increase or decrease, it can impact the amount of coverage needed. If the family relies on the insured`s income, consider adjusting the sum insured amount of life insurance including income protection, life, disability and critical illness, to reflect current earnings and financial obligations.

Mortgage or debt changes

Changes in debt levels impact how much life insurance one may need. The higher the amount of debt, the higher the insured amount needed to discharge or service this debt, should the unforeseen happen. Conversely if debt is reduced significantly, the insured amount may be able to be reduced. Note any change in insured levels will likely increase or decrease premiums – please speak to a financial adviser for more details.

Changes in health

If there have been improvements in health, it may be an opportunity to review the policy and see if better terms or lower premiums can be secured. 

Retirement planning

As retirement approaches, financial goals and insurance needs may shift. A review of life insurance can help ensure that coverage aligns with any post-retirement financial objectives, such as providing for a partner, covering end of life expenses, or leaving a legacy.

Divorce or separation

Life changes such as divorce or separation can have a significant impact on financial situations and dependants. It is crucial to review any life insurance to determine if adjustments are needed to accommodate these changes, including any potential changes to beneficiaries and payees.

How to review life insurance

Ensuring life insurance is right for one's circumstances

Factors that affect the amount of life insurance required depends on individual circumstances and the types of life insurance being considered. Most insurance policies will provide options to be able to adjust the policy so that the cover and premiums are aligned to the insured’s objectives.

The below looks at several factors which may be considered when calculating life insurance premiums. 

Life insurance

Benefits from a life insurance policy are paid on the death of the person insured, so it is important to consider the needs of any dependants and beneficiaries. Some things to consider are any outstanding debts, loss of income over an expected lifetime, education expenses, and funeral expenses. These financial commitments may be offset by any existing life insurance, investments or savings. 

As life insurance is triggered by death, considering factors that would impact one’s beneficiaries are key. That is, loss of income, any debts, existing investment and savings, existing insurance cover, education expenses and funeral expenses.

Total and permanent disability insurance

TPD insurance provides policyholders with a lump sum payment in the event of total and permanent disability in either any occupation, their own occupation, or Activities of Daily Living (ADL), as stipulated in the policy document. The lump sum payment provides the insured the ability to use the proceeds as they choose. This could include such things as repaying debts, modifying their home for accessibility, and contributing towards medical costs including ongoing rehabilitation. This aids in giving peace of mind by reducing the financial burden.

Critical illness insurance (trauma cover)

Critical illness insurance (trauma insurance) is a type of life insurance cover that offers a financial benefit if the condition and severity are covered by the policy. If a benefit is payable, it may provide the ability to cover day to day living expenses, allow the insured to seek medical care and options related to their illness, and support the insured’s family’s quality of life during the insured’s treatment. 

Income protection insurance

Income protection insurance works by providing an income replacement payment when the person insured is unable to earn an income due to injury or illness. Benefits are usually paid as monthly payments representing a portion of pre-disability income. The portion of income paid as a monthly benefit will depend on the pre-disability earnings, with most income protection policies typically paying a benefit of up to 70%. The amount of the monthly benefit will be assessed at claim stage and is based on the lessor of the amount insured and a percentage of the insured’s income at claim time. Depending on the income protection policy and/or insurer, the policy may include a contribution to superannuation as well as the benefit paid to the insured.

Managing life insurance premiums

The two common premium structures offered by Life Insurers are Variable Age-Stepped (previously called Stepped Premiums) and Variable Premiums (previously called Level Premiums).

• Variable Age-Stepped Premiums
  • Are calculated based on the age of the insured at each Policy anniversary.
  • As the insured person ages the premiums usually increase to reflect the increased likelihood of claimable events over time.
• Variable Premiums 
  • Are calculated based on the age of the insured at the Policy start date
  • In earlier years these premiums are generally higher than aged stepped however in later years may be comparatively less than aged stepped because the annual premium does not increase with the insured age. 
• Also available from some insurers are Fixed and Fixed Age-Stepped Premiums, which sets the premium amounts and may be reviewed after a set period (e.g. one year). 

Premiums can also change due to any tax, duty or charge or changes introduced by government, or if the insurer changes their premium rates. Both Premium structures can change for a range of other reasons, please see the relevant product PDS for more details. 

It is best to compare life insurance policies with different life insurance providers to find the right policy that fits individual circumstances.

Policy term

Life insurance policies continue for the term of the policy with an annual notice from the life insurer explaining the cover, premiums, and any special conditions on the policy. This is an excellent time to review the cover. Check if there are any changes in the policy terms, premiums, or benefits. Evaluate if the policy still aligns with current needs and financial goals.

Regularly reviewing life insurance is essential to keep coverage up to date and aligned with personal circumstances and financial goals. Life is constantly changing and so are insurance needs. By assessing one’s policy at these key points, informed decisions can be made to ensure that loved ones are adequately provided for, and that the insurance remains an integral part of one’s financial planning.