Take Stock And Then Take Cover
Sydney Morning Herald
Wednesday November 3, 2004
The strategy To make sure I have enough life insurance.
Why do I need to do that? A survey conducted by Newspoll for CommInsure (the Commonwealth Bank's insurance arm) has found almost a third of 18- to 59-year-olds have no life insurance, and many more may be underinsured. It found less than one in three Australians in this age group have a personal life insurance policy, with the rest relying on insurance provided by their super fund or not being covered at all.But they're in the business of selling life insurance; they would say that. Fair point. However, it's also true that many Australians are underinsured and don't consider the need for life insurance unless something happens to someone close to them. If you care what would happen to your loved ones if the worst happened, you need to review your insurance every couple of years to make sure you have enough.How much do I need? There are rules of thumb promoted by the insurance industry - seven to 10 times your salary is a common one. Laura Menschik, the managing director of Millennium Financial Services, says it depends more on your personal circumstances. If you have no dependants, for example, it doesn't matter much (from a financial viewpoint, anyway) if you die without life insurance, but you'd probably be vulnerable financially if you had an accident and became disabled. So some form of disability insurance would probably be more important than having lots of life insurance.If you do have dependants, says Menschik, you should ask yourself how much they would need if the worst happened. At the minimum, she says, most people would probably want enough money to pay out their debts so that they were not leaving a financial liability behind. You might also include things such as funeral expenses in this minimum.If your family is financially dependent on you, you may also want to leave them enough money to fund their lifestyle. Depending on your needs, this could range from a lump sum large enough to cover specific expenses (such as the childrens' education) to a larger lump sum designed to give your family an ongoing income.Whoa! That's starting to sound like a lot of insurance. It is, but Menschik says once you've reached this ideal figure, you can then look at what assets and financial resources will be available to reduce the sum needed. Things like second cars, super payouts, or investments that may be sold can reduce the amount of money your family will need - leaving insurance to cover any shortfall.It still sounds like being fully insured could be an expensive business. Once you know how much your family is likely to need, it becomes a trade-off between the costs and benefits. Menschik says it's also important to structure your life insurance so that you get the maximum benefit for the money spent. Life insurance bought through your super fund, for instance, is more tax-effective because it can be paid for from pre-tax super contributions rather than your take-home pay. Your dependants (but note, there are restrictions on what constitutes a dependant) can receive up to the pension reasonable benefit limit (currently $1,238,440) as a tax-free lump sum tax benefit. Menschik says you can also (providing the super fund allows it) arrange for the benefit to be paid to your spouse or children as a tax-effective allocated pension, giving them an income when you're gone. If you're serious about estate planning, you should get advice on how your life insurance can be used most effectively.Do I need life insurance if I don't work? Again, the question is: what will my absence mean for my family if I die? If you're at home looking after the house and children, for example, you may not think you need life insurance as you're not earning an income. But if you died, your spouse may need to hire a housekeeper and/or nanny, which doesn't come cheap. Life insurance could help to pay for that.
© 2004 Sydney Morning Herald