Five tips for choosing the right life insurance policy

None of us like to consider our own demise but as actor Anthony Hopkins once said, "None of us are getting out of here alive", and having insurance is especially important if you're carrying big debts or have a family.

Life cover has the potential to let you or your family dodge financial hardship if tragedy strikes. But this hinges on having the right level of cover.

Nine out of 10 working Australians have life insurance, usually through their super fund. However, it may not be enough.

According to actuaries Rice Warner, among those Australians who have life insurance the median level of cover is just $143,500.

That's double the median household income but Rice Warner cautions that we typically need cover worth three to six times annual income, depending on our age. This makes it important to contact your super fund to check your cover. Chances are you could be underinsured.

Cover through super may not be the best option

One way to solve the underinsurance problem is to top up the cover you have through super. This can seem like an easy option though it may not be the best one.

Buying life insurance through super means you won't have to dip into your pocket today. The catch is that premiums are paid out of your super account each year, and over time this can substantially erode retirement savings.

A 2018 report by the Productivity Commission found that life insurance premiums can reduce retirement balances by 14%. If you're a low-income earner or have broken work patterns, premiums on life cover can slash your final fund payout by more than a quarter.

One way to combat the effect of premiums on your super balance is to make sure you top up your super with extra money to cover the costs.

Of course, you can also look at buying life cover outside super. In some cases it may be cheaper to buy through your super fund but don't just assume that this will be the case. It's best to compare prices for yourself and also take into account the type of cover you're getting for your money.

Protection tailored to your needs

Tania Milnes, general manager at Mortgage Choice Financial Planning, says policies within super are generally "group" policies (a bit like buying in bulk) and quite often are cheaper. The downside is that the cover isn't designed for your personal situation.

Anthony Brown, CEO of insurer NobleOak, says buying life insurance outside super is an opportunity to have cover that "takes your individual health into account".

A survey by Canstar found that for 83% of Australians, the cost is the key stumbling block for life insurance. But it can be more affordable than you think. Premiums hinge on your age and lifestyle (for example, smokers are heavily penalised). Canstar found a 40-something non-smoker could pay less than $50 a month for cover

Know how much you need

Comparison sites offer an easy way to shop around, though it helps to know what you're looking for.

"How much cover people should have is based on their individual circumstances - their age, whether they are single or not, and whether they have dependents such as children," says Brown.

Financial obligations such as your mortgage, credit card debts, living expenses and costs associated with children's education should also go into the mix.

MoneySmart and industry website Lifewise both have online calculators that can help you decide how much cover you need. From here, it's a matter of following our five tips to get the cover that suits your needs and budget.

1. Check age limits

Australians are living longer and enjoying better health but many 60-somethings still have major debts such as a mortgage. Brown says that cover in super automatically terminates when you reach retirement age (usually 65 or 70). By contrast, through independent insurers you may be able to hold onto life insurance all the way to 99.

2. Understand the different types of premiums

Premiums for life cover are levied in a variety of ways. Tania Milnes says "stepped" premiums are by far the most common. She explains that the cost rises over time "as you get older and are more likely to make a claim".

"Level" premiums stay the same each year (except for increases in inflation), and while Brown says they are more expensive in the early years they can work out cheaper if you hold onto cover for the long term. The catch is that level premiums generally revert to stepped premiums from 65.

A third option, "hybrid" premiums, gradually increase for a defined period, usually to 65, then fix at a set rate.

The key, according to Milnes, is to "match the premium type to how long you'll need to keep each particular cover".

3. Look for "guaranteed renewable" cover

"Guaranteed renewable means that as long as you pay your premiums, the insurer guarantees to keep your cover in place, even if your health, occupation or pastime change," says Brown.

Cancellable contracts, on the other hand, give the insurer the right to refuse to renew your policy.

Miles says premiums for guaranteed renewable cover can cost more.

"The certainty that your cover will stay in place on the same or better terms as long as you pay your premiums comes at an additional cost. But most people would rather have the comfort of knowing that the insurance company must honour your policy."

4. Add up the add-ons

We all like a few extra perks with purchases, and life insurance is no exception. Add-ons vary between insurers but can include things like funeral advance benefit, grief counselling, nursing care and spouse benefit.

As with any type of insurance, only pay for the features that matter to you.

5. Skip the quick fix

Life cover is one area where it's worth spending time getting things right in the first place. As Brown says, "That way, if you make a claim there are no surprises at a critically important time."

Life policies can either be underwritten - or not fully underwritten - at the time of taking out cover. It's an important distinction.

Underwriting is the industry term used to assess risk. According to Brown, an underwritten policy typically involves a complete health assessment, including a discussion of any pre-existing conditions, when you apply for cover.

Yes, it may call for an investment of your time initially but the premium you pay will be tailored to your situation and, more importantly, Brown says that any claims are likely to be processed with minimum delay.

Policies that are not fully underwritten can be quicker to organise - many can be arranged online just by answering a short questionnaire. The catch is that with non-underwritten policies, the detailed review will be completed after you make a claim.

"This process will nearly always delay payment," says Brown. It also creates more scope for claims to be reduced or denied altogether.

The bottom line is to know how much cover you need, check what your super fund is offering, and shop around to be sure you have a competitively priced policy that will meet your needs over time.

This report was sponsored by NobleOak but was independently researched and written

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