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What life insurance is good for

Having your mortgage, debts and day-to-day expenses covered is a recipe for peace of mind, writes Sally Patten.

Being – or becoming – financially independent is about more than saving and investing.

Protecting what you already have, including your current lifestyle, is also part of that financial equation.

We may consider that we live in the lucky country – but few people can afford to have a bad-things-only-happen-to-other-people mentality. Unfortunately, anything can happen to any of us.

This is where life insurance comes in.

Life insurance policies will pay out a sum of money if the insured person dies, becomes permanently disabled or suffers a debilitating illness and can no longer work. Policyholders pay monthly premiums, just as they do for car or home and contents insurance.

It is worth noting that underinsurance is a chronic problem in Australia, so if you don't have enough insurance to cover you if you become ill, unfortunately you will not be alone. Professional services firm KPMG estimates that 35 per cent of the population has no disability insurance

  

Furthermore, say the experts, most families don't appreciate the need to obtain cover for non-working spouses. If a non-working spouse becomes incapacitated, the family will need to meet the cost of their care, as well as – potentially – the cost of childcare and other expenses.

"If the stay-at-home parent were suddenly no longer around and the surviving parent needed to continue going to work to make ends meet, the cost of hiring someone to look after the home would be overwhelming," warns Russell Cain, chief executive of LifeInsuranceDirect.

"Insuring the stay-at-home parent for death or critical illness can help alleviate financial stress at a very difficult time," he says.

Cain says that when deciding how much insurance is needed, individuals should aim to cover at least three major expenses: mortgage payments, other debts and day-to-day living expenses.

Most Australians are at least partly insured through their superannuation funds. In other words, part of the annual contributions to super are used to pay insurance premiums. The advantage of this is that the money used to pay for premiums is only taxed at 15 per cent, rather than at the marginal tax rate, which for many people is higher. As a result, a good place to start is to ask your super fund how much cover you currently have and to consider buying more cover through super if it is not enough.

However, there are limits on how much super funds will be prepared to pay out if you die or become disabled, so it may be necessary to top this up with private insurance.

Cain says it is imperative to find a policy that suits your budget and circumstance. It might also be worth hunting around for policies that offer free child cover, which means you will receive a lump sum if a child dies, or gets diagnosed with a nasty condition.

'It's a safeguard'

"Just in case" is the reason Mun young Choi (pictured) and her husband both took out life insurance policies three months ago.

The couple don't have a mortgage but they do have a nine-year-old daughter.

"I don't want to think about it, but if something happens to my husband it might be good for me and Josie. We would get something," says Choi, 41. "It's a safeguard."

Personal insurances are not a priority in Choi's native Korea, where the focus is on health insurance as there is only limited government health assistance to rely on. It's one of the differences, both minor and major, that Choi has adapted to since relocating with her Australian husband four years ago.

Choi first lived in Australia, working and studying for four years, in her twenties. She had been a journalist and was curious to try another culture.

"I really wanted to go to the US or Canada but my Australian visa came early."

Choi didn't know anyone, but loved it.

"Sydney was so beautiful and I was totally free, free as a bird, no one to interrupt my life. Later, I missed my family so much."

She met her life partner at church just before she left Australia.

"He said hello in Korean; he spoke my language. He went to Korea a few times as an English teacher when he was a uni student. We became really good friends. I really liked him."

He just happened to come to Korea, they married and had a baby. "I quit work because we had to move to a different city for my husband's work.

"But women stay at home as a mother there; it's not a shameful thing like here, where women say, 'what do you do?’,” says Choi, who lives in the aspirational Melbourne suburb of Ormond.

They came to Australia to be near her husband's family and to improve their daughter's English. Choi has started training as a nurse's aid. "Once I get a job, I'll probably think of saving," she says. "I don't know how long we're going to live but you still need to think about the future."

Case study by Natasha Hughes

  

June 2016