Life Cover, is it Important?

Posted on: 18.04.2016

No one likes to talk about death and terminal illness but unfortunately it is a conversation which cannot be avoided if you truly care about the people you are leaving behind. We never like to think about the worst case scenarios but the reality of it is that these things happen and without the right insurance or life cover, the result is financial ruin on top of emotional devastation.

What is Life Cover?

Life cover is very simple, it is a lump sum paid out in the event that you should die or become terminally ill.

Why is it important?

If you have a young family or a spouse who is financially dependent, what happens should you no longer be around? Who is going to provide for your family? Who is going to pay the bills? These are the sort of critical questions you need to ask yourself.

If you don’t have a definitive answer to these questions, chances are you need life insurance.

Can I pay for my life cover through my superannuation?

Absolutely! You have the option to pay death cover via personal funds or through your superannuation. Structuring it through your superannuation means your personal cash flow is not affected and can be more tax effective then if you were to pay for it yourself.

A simple example:

Tim is a 35 year old carpenter who earns $120,000 per annum. Tim has 2 young girls aged 6 and 10 and his wife Mary works part time in an administration role for $30,000 per year. They have a family home worth $500,000 with a mortgage of $450,000 which costs $22,500 in loan repayments per year (interest only). The girls education costs are about $5,000 per year and it costs their household roughly $500 per week for all expenses. Now we will look at the outcome with and without death cover for Tim’s wife and children if he were to pass.

No death cover for Tim:
Mary’s wage is just enough to meet their living expenses of $500 per week however without Sam’s wage she has had to sell the family home as she cannot afford the minimum repayments. After selling the house the remaining equity went to funeral expenses and estate wind up costs so she receives nothing from the sale. The result is she now has minimal income, nowhere to live and 2 young girls to support on her own.

$800,000 death cover for Tim:
Mary receives an $800,000 lump sum to use as she sees fit. Mary puts $450,000 toward the mortgage and pays it out so the girls have a stress free environment to live. She has enough lump sum to cover the girl’s education expenses through to completion of high school ($90,000), enough to cover funeral expenses and estate wind up costs of $20,000 and a remaining lump sum of $240,000 to top up her existing income to make sure her and the girls have enough to live.