Don’t Make This Mistake With Your Life Insurance

Posted on 24. Apr, 2013 by in Wealth Essentials

Life insurance mistake

I hate paying for life insurance, or any insurance really. It bothers me that I’m giving away money for something that (I hope) I will likely never use, but these days the risks outweigh the rewards of foregoing this expense.

That doesn’t mean I’m happy about it though.

Fortunately, things that bother me usually also motiviate me in some way. In the case of life insurance, I was motivated to find ways to ensure I was covered without paying large sums of money, so I did some homework.

Unfortunately I did the homework around the same time that my wife and I had our first child, which meant that I wasn’t completely on the ball and ended up paying for it in a major way.

Today I want to share what I learned and show you how my mistake ended up helping me work things out and will hopefully help you too.

Do I need life insurance?

Up until I was about to become a father for the first time, I hadn’t given life insurance, disability insurance, or even income protection much thought at all. I’m not really sure why I hadn’t thought much about it, I guess I just assumed like many others that nothing would happen to me.

One day that all changed. At some point during my wife’s pregnancy I came up with the rather ill informed idea of purchasing another investment property. It was an ambitious move that I’ll tell you all about another time, but very soon after the paperwork was all signed I felt the weight of my decision and realised the need for protection of some kind.

My big mistake

As is often the case, the brokerage I was dealing with for my property purchase also had people that could help me with life insurance (I should have really known better). Before I knew it, my wife and I had some rather impressive coverage all structured through our new superannuation (pension) scheme, with very little work required by us.

It took a few months for the haze to clear after our child was born and to realise just how much the new insurance was costing us (the draw-back of it not being an out of pocket expense), but I eventually woke up and realised my error.

While the insurance was being paid by our retirement funds at no direct cost to us, it had basically halted all growth and would mean a much smaller retirement amount over time. 

As you can imagine, there is plenty of help available when you are trying to arrange new life insurance, but there isn’t too much offered when you are trying to undo it all and start over without incurring further costs. I can tell you there was A LOT of paperwork.

Reducing the cost of life insurance

The one good thing that came out of the mess was that I learned a lot about the types of insurance I could access, how they could be structured and what I needed to look out for. Armed with this information I was able to identify a superannuation scheme that could offer me what I needed:

  • Significantly lower costs than the one we were using
  • Cover for income protection*, life and disability insurance (many don’t provide all of these together)
  • The ability to increase my coverage based on my personal situation (some have limits)

* In my case the income protection only lasted for 2 years at 75% of my wage. I could have taken additional protection through another provider, but it would have been an out of pocket expense. I’m happy at the moment because I know 75% of my wage is enough to live on and I’m pretty confident I could do something about work with a couple of years (optimist?).

It doesn’t seem like a lot to ask for, but believe me there can be some significant differences in costs and some schemes will not provide full cover in all areas (particularly life insurance). My advice is to shop around, find something that looks reasonable to you and compare it with other alternatives offered by your bank or private health provider to get a good feel for what is about right.

It is pretty tough to go past using your superannuation scheme wherever possible though, here’s why:

  • It’s often cheaper because they purchase insurance policies in bulk
  • Your premiums are paid from your super account, not your after-tax income
  • You can get decent cover for you and your family, without having to find it in your budget
  • Some funds will accept you for cover without requiring a health check

I know that I’m giving you my Australian perspective here, but the research I’ve done tells me that structuring your life insurance is completely possible through a 401K if you live in the States, or similarly through your pension scheme if you live in the UK (shout out to my international friends ;)).

If you haven’t looked into using your superannuation / pension as a way to ensure you are covered without footing the bill directly out of pocket, then why not do a little investigating of your own?

Let me know if you fund your life insurance this way, or have a better strategy of your own.

(P.S. the lessons learned from my investment property saga will coming up in the near future – stay tuned!)

Image by kag2u

Tags: , , ,

No comments.

Leave a Reply