Term life cover provides a lump sum payment on death of the life insured.
Trauma cover pays a lump sum on the diagnosis of specific medical events
Other Useful Pages:
How Much Life Insurance?
Why Life Insurance:
The main reason for establishing life insurance is to provide a lump sum payment to ease the financial burden of those that you leave behind. A common case is a family with children where one income earning parent dies. The life insurance can enable the survivors to go on without having to make financial sacrifices.
Not only is life insurance used to reduce debt, but it can also pay for one-time costs that are connected with death, such as funeral and burial costs, administration costs (e.g. for probate), and outstanding debts (such as final medical expenses not covered by private health insurance).
Knowing that you have a requirement for cover is the first
step, the next step is to work out how much cover, the type of cover you need
and then the best method of taking out the cover.
Initial Considerations:
If you have no dependents and have enough money to pay your final expenses they
you may not need any life cover at all.
If you have dependents, you should establish a level of life insurance that will provide a lump sum payment to ensure the financial security of your dependents. There is not exact science to work out the amount of cover that is needed, it is a subjective process and we have detailed some common methods below.
Calculation Methods:
Some brokers and advisers will recommend a multiple of your salary method for
determining the amount of cover that you need. Suppose you are earning $50,000
per annum and you have 20 years until retirement. In simple terms over the next
20 years you will produce income of over $1,000,000. Whether this level of cover
is required is also determined by the dependents that you have. If you were
married with no children, and your partner was also working then this cover
could probably be reduced. If you have a non-working partner and 5 young
children this level of cover may not be enough.
Another method is to take a simple clear debt philosophy, and then leave an additional sum for those left behind. Suppose you have a mortgage of $250,000 and you are married with 2 young children. In determining your cover you start with $250,000 to clear the mortgage, and then want to leave a large sum to assist in raising the children. You decide to establish cover of $750,000 as this is deemed appropriate.
There is no set method, and every person is different. One very important point to remember is that there may be an ideal amount of life cover for you, but this may also have premiums that affect your financial position, so sometimes a trade-off must be made and reduce the amount of cover to a more affordable level. At least you have made the effort to establish cover unlike a majority of people.
Amount of TPD and Trauma Cover:
Again, there is no set method of the amount of TPD and trauma cover that people should establish. Bare in mind that TPD is not an expensive addition to life cover and therefore is commonly established to the same level of life cover. Depending upon your personal circumstances it is common for people to match their amount of life cover with TPD cover for the first $500,000 of cover. After that it is common to leave the TPD at $500,000 and let the life cover only be increased.
With trauma cover this is designed for medical emergencies. Trauma cover is the most expensive cover on a premium basis. Common amounts of cover range from $50,000 - $200,000 and the amount is very much dependent upon someone's financial situation and the importance that they place on this type of cover..
Caution
Financial Advisers
and brokers are often extremely worried about potential liability in the future
when looking at the amount of cover you should establish. Everyone has their
'ideal' amount of cover, but often the expense simply makes it uneconomical to
establish. Therefore you should prioritise your cover to ensure that the most
important risks are covered first.
Remember, this is the type of insurance that after 20
years you should be pleased that you never claimed on!