Question

At what age should a young person consider life insurance?

Answer

I’ve covered the different types of life insurance and the amounts required in more detail here however to answer the question more specifically, a young person should have considered life insurance yesterday.

I hate to scare people into buying insurance however most people would be terrified of the thought of driving a new $25,000 car out of a car yard without having comprehensive insurance. I’m in favour of comprehensive car insurance however if you wrote off a $25,000 car without insurance, as much as it would suck you can recover from it.

Now think about your income. Over the course of your life, this will equate to hundred of thousands, if not millions of dollars and if you were to lose the ability to earn an income you could be in a bad financial situation which is near impossible to recover from. Most people don’t ever consider getting insurance coverage either because of the expense or they don’t consider the risks or know that these risks can often be reduced or eliminated by insurance.

I get it, I should consider insurance. But what type?

There are 4 main types of life insurance and whether these are appropriate for you will depend on your individual circumstances.

Life insurance – life insurance will pay a lump sum amount to your family if you were to die. So, if you have dependants whose life would change from a financial point of view if you were to pass away today (and lose your income) you probably need to consider life insurance. If you don’t have dependents, you probably don’t need to consider it.

Total & Permanent Disability (TPD) insurance – TPD insurance will pay a lump sum amount to you if you were to become disabled and never be able to work again. So, if you and possibly your families life would change from a financial point of view if you were to become disabled and never be able to work again (and lose your income) you probably need to consider TPD insurance. This often extends to people studying or people looking after the kids and home who don’t earn an income right now but their or their families life would change if they became disabled.

Income protection – income protection will pay an income stream to you if you are unable to work due to illness or injury until the end of the benefit period e.g. age 65. So, if you and possibly your families life would change from a financial point of view if you were unable to work tomorrow for an extended period of time (and lose your income) you probably need to consider income protection.

Trauma insurance – trauma insurance will pay a lump sum amount to you if you are diagnosed with a critical illness e.g. cancer, heart attack, stroke etc. So, if you and possibly your families life would change from a financial point of view if you were diagnosed with a critical illness and possibly be unable to work or pay for out of pocket medical expenses, you probably need to consider trauma insurance. Although these critical illnesses are less likely for younger people, premiums become more expensive as you get older so your future self could thank you if you get coverage in place now.

Often these coverages interact with each other so more than 1 type of cover may be required depending on your individual situation so if you’re not sure you should speak to an independent financial adviser.

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