A new survey from insurance comparison site comparethemarket.com.au suggests that one in three (36%) Australians without life insurance are unaware that if they died their partner could be left paying off their debts.
With 40% of the 1138 respondents confirming they have a joint mortgage and 43% with at least one joint credit card, their surviving partners could face a huge financial burden in the event of their death. Especially when the average Australian mortgage is $461,000* and the average credit card debt is $4,775**.
“People need to understand that any debts they have in joint names will become the sole responsibility of the other account holder. This means their partner will have to pay off everything that is outstanding,” said Abigail Koch, spokesperson for life insurance comparison website comparethemarket.com.au.
The survey also explored how respondents believed their partner would cope financially if they were no longer around. More than a quarter (28%) acknowledged that their partner would not be able to pay their bills or maintain their current lifestyle. Of those respondents with dependent children, this figure shot up to 36% – a concerning statistic, given one in five families^ face the death or illness of a parent leaving them unable to work.
The survey then asked why respondents didn’t have a financial safety net for their family, such as life insurance. Some 19% said it was because they never thought about their death. This is despite nearly half (47%) saying they had either a family member or a close friend who had died prematurely.
A further 52% said they didn’t have life insurance because it was too expensive, and another 12% believed it was only for people on large salaries.
“Despite its inevitability, the vast majority of people choose not to think about or plan for their death. Life insurance can cost less than $50^^ a month and can pay out a $400k lump sum. Comprehensive car insurance for a $40k car often costs more than $50 a month. With this in mind – $400k versus $40k – it’s surprising more people don’t take out life insurance given its benefits,” said Abigail.
Comparethemarket.com.au highlights 5 steps to setting up a financial safety net:
1. Talk to your partner about how you would cope financially if they were no longer around: As eternal optimists, many people push thoughts of death and illness to the back of their minds. However, when statistics show that one in every two people knows someone who has died prematurely, odds are it is best to be mentally prepared just in case. It doesn’t have to be a morbid conversation and it is the first step to getting a financial safety net in place.
2. Get to grips with your household budget: To build a financial safety net, you need to have a clear understanding of the ‘financial health’ of your household. A detailed budget listing all of the money coming in and going out can help you take control of your finances. It will give you a clear idea of areas where you are overspending and areas where you might be able to find some savings. ASIC’s MoneySmart has a helpful budgeting tool.
3. Consider methods of bringing down your monthly outgoings: Once you have a household budget in place then it might be a good time to try and reduce your monthly outgoings. This could be something major such as refinancing your home, and with interest rates at record lows, this could make sense for you. If you’re not ready for such a big change, then simple steps like planning a weekly menu before visiting the grocery store or making the most of shopper dockets before filling up your car could help you save over the month.
4. Get serious about savings: One of the best ways to save is to set yourself a savings goal. Work out how much you need – it could be to pay off a particular debt or to save up for a holiday – and then work out how much you can afford to put away each week in order to meet this goal within a certain amount of time. Rather than keeping your savings under a mattress, it can make more sense to choose a savings account that enables you to earn compound interest on your savings.
5. Consider if life insurance is right for you and your family: If you’re managing to squirrel away $50 or so a month then you might want to consider using these savings to purchase a life insurance policy. This will give you peace of mind that your family is protected by a financial safety net just in case something should happen to you.
* AFG Mortgage Index – July 2015 (http://www.afgonline.com.au/wp-content/uploads/2015/07/AFG-June-Mortgage-Index.pdf)
** ASIC’s MoneySmart Credit Card Debt Clock (https://www.moneysmart.gov.au/borrowing-and-credit/credit-cards/credit-card-debt-clock)
^ Lifewise/NATSEM Underinsurance Report – Understanding the social and economic cost of underinsurance, February 2010
^^ Premium based on a 32 year old non-smoking male accountant living in central Sydney (Life cover: $400k, TPD cover: $200k, Trauma cover: $200k).