Congratulations on starting your family! It’s bound to be a wonderful time, as you imagine what it will be like to bring your baby home and watch your family swell from two to three. You’re going to be very excited (and perhaps a tad nervous!) about your little person’s new life – how they’ll grow up, what they’ll achieve, what they’ll need to thrive and succeed and your own role in all of this. Will they be a maths whiz or love to play piano? Will they learn a trade or attend university?
As the months pass and you count down to delivery day, you’ll undoubtedly work through a lengthy list of things that you need to prepare for your baby’s arrival. This may include setting up the nursery, installing the car capsule, road testing prams, and buying baby clothes and countless nappies. You’ll likely need to sit down and work out a monetary plan with your partner. Your new role as a parent going to take some adjustment; adding a new baby to the budget and living on a reduced income can be tricky! However, the reduced income may only be temporary and you’ll be happy knowing that other parents make it work for them every day.
But what if you were reduced to a single income permanently? How would you pay for school fees, mortgage payments, petrol, and hospital visits? How about all the other expenses, both small and large, that come with raising a family? Would your family survive financially if something happened to you or your partner? It can be hard to face your own mortality amidst a celebration of new life, but in starting a family, you’re forced to face the ‘what ifs’.
For example: What if you get sick? What if your partner passes away? What if you become permanently disabled? What would happen to you and to your children? Such situations are endless and uncomfortable to think about, but the good news is that you can protect your family and make sure they’re financially secure in the future. Life insurance can provide you with peace of mind and protection against the ‘what ifs’.
There’s no getting away from the facts – family life is expensive. According to the AMP.NATSEM Income and Wealth report published in 2013, the average middle-income family with two children will spend $812,000 on raising their children from birth to 24 years of age. This includes costs for basic things such as health, food, shelter, and clothing, as well as transport, recreation (think ballet lessons, sports club fees, family holidays) and education. You may also want the option of private schooling for your children, which will increase education costs significantly.
Although the shape of the family unit in Australia is changing, the majority of families still model the ‘traditional’ structure of a father, a mother, and one or more children. In the past, mothers have remained at home to raise their children until school age. However, the rising cost of living means that in many families, both parents return to part-time or full-time work during their child(ren)’s early years. According to a 2008 report by the Australian Institute of Family Studies, 44% of mothers return to work in some capacity by the time their child reaches twelve months of age.
In Australia, childcare fees can cost up to $160 a day per child in metro areas, with this figure dropping slightly in suburban and rural areas. Hypothetically, if a mother of two returns to full-time work in the years before her children attend school, gross childcare fees will equate to approximately $40,000 per annum. Whilst there are government tax incentives available to defray childcare costs moderately, these tax benefits are income-tested, so upper-middle and high-income earners will bear the majority of these costs themselves.
Budgets are hard enough to balance when both parents are able to work. However, according to the 2010 LifeWise/NATSEM Underinsurance report, one in five Australian parents will pass away or become disabled before retirement age. How would you or your partner cope if you suddenly had to rely solely on a single income? Considering life insurance is one way in which you can look after your family if the unthinkable occurs.
At its most basic, life insurance products provide financial protection for you and your family in the event of accident, severe illness or death. Like all insurances, you pay a weekly, monthly or yearly premium which provides your family with a valuable financial safety net if you pass away or are unable to work.
There are several types of life insurance, including Life Cover (also known as Term Life Insurance), Total and Permanent Disability (TPD), Trauma Cover and Income Protection. What you need will depend on your individual circumstances. Remember that many forms of life insurance require you to disclose any pre-existing medical conditions, so make sure that you’re always upfront with the insurer about any illnesses or ongoing health concerns.
Life Cover (or Term Life Insurance) provides a lump sum payout in the event of death, or upon the diagnosis of a terminal illness. Depending on the amount of cover taken, this could allow your family to pay off the mortgage and other debts, and secures their financial future by providing for future expenses such as childcare and school fees.
Total and Permanent Disability (TPD) covers you upon confirmed diagnosis of a permanent disability that prevents you from ever working again. It provides a lump sum payout that can be used to cover medical costs, pay off your mortgage and other debts, and invest to provide for future income.
Trauma Cover (or Critical Illness Cover) pays out a lump sum if you experience one of several severe medical conditions, such as heart attack, stroke or cancer. This allows you to take care of medical costs and other expenses while you receive treatment and recover.
Income Protection insurance provides you with regular payments of up to 70% of your yearly income, in the event that you are injured or fall ill and are unable to work. It covers you until you are able to return to work, up to the age of 65 if the illness or injury is ongoing.
Like any type of insurance, make sure you review your policy details and cover amounts regularly. Over the course of your life, your financial commitments and your income do change, so it’s important to check that you are wholly covered for what you need. In some cases, you may even be able to reduce the amount of cover you need, especially later in life when you’ve finished paying for major lifestyle expenses such as your mortgage or your child(ren)’s school fees!
You can find life insurance policies to suit all family types and situations, including whole-family life insurance cover, women only, and high risk job cover. All insurance policies have different levels of cover and therefore, different terms and conditions. Not all policies are created equal and it’s important to shop around for the type and level of cover that will best support you and your family if a difficult time should arise. Make sure you read each PDS (Product Disclosure Statement) carefully.
There’s no secret equation for calculating how much life insurance you will need to protect your family; it depends on your individual circumstances and financial commitments. Many people choose to cover themselves for an amount that would significantly reduce or pay off their mortgage and any other existing debts. Others work it out by calculating the amount based on a multiple of their income.
Although more insurance means more cover, more cover generally also means a more expensive premium, so you may need to prioritise and balance your wants and needs when choosing a cover amount.
Luckily, life insurance doesn’t cost the earth! The cost will depend on the type and cover amount you choose. Be aware that different policies have different premium types, like stepped and level premiums. A stepped premium gets recalculated at each policy renewal date and will increase incrementally each year, based on age and other health and lifestyle risk factors. A level premium is calculated upfront based on the age you are when you take out the policy. As the premium amount remains the same each year, level premiums are usually more expensive from the onset, but may save you money in the long run, depending on what stage of life you are at.
You work hard to provide for your family, and that shouldn’t go to waste. With life insurance on hand, you can have peace of mind that even if you or your partner pass away or unable to work, your family will be taken care of. You’ve spent hours reading baby books and parenting magazines, preparing for your little one’s arrival; why not spend a few more minutes securing their future financial security by comparing your life insurance options?
