Life insurance vs car insurance, which would you go without?
If you had to choose between life insurance or car insurance, which would you choose?
According to insurance company AAMI (1), more than 80% of Australian drivers say they have car insurance. Yet many people fail to protect their family's income producing resources, life insurance for both spouses is something that is vital.
There are plenty of reasons for not having life insurance. Some of them are irrational, the idea that talking about disaster can make it happen.
Life insurance is about planning for the future
According to one life insurance company survey, nearly a third of Australians found it difficult or unpleasant to discuss insurance with their partner (2).
One other factor that stops people taking out adequate insurance is the belief that other safety nets will do the job, such as savings or superannuation death benefits.
But I have Super - relying on a superannuation death benefit to meet family commitments after death may be fraught with danger. How many of us assess the life insurance benefits available inside super? The default amounts may not be enough to protect your family.
But I have long-term savings - do you have a nest egg capable of paying off a mortgage and looking after your family's financial needs?
It does take some time to think about it all, but planning for the future of your loved ones should certainly be up there. Life insurance should be just as important as car insurance, if not more so!
So what is life insurance?
What is life insurance you may ask? It's all about risk.
Risk is the chance of an event resulting in loss, something valuable getting stolen or a person suffering injury or even death. Life insurance doesn't remove the risk of terminal illness or death but it provides compensation and financial security for the policyholder, you and/or your family, if something bad happens.
There is a significant underinsurance problem in Australia. Industry bodies such as IFSA (the Investment and Financial Services Association) believe much of this underinsurance is the result of a poor understanding of how life insurance works and of the financial risks we face throughout our lives.
Life insurance - is there an alternative?
To understand the true value of insurance it is useful to consider the alternatives. Let's say, instead of using life insurance you wanted to build up a lump sum of money to take care of your family should illness, injury or death affect your ability to meet mortgage payments and put food on the table.
Firstly, you'd need to build up a substantial sum of money and that could take a long time. Secondly, you'd have to invest your money where you could get at it easily, such as a bank account. So your ability to earn a high return on that money would be reduced. You'd need serious willpower to save all that money even though there may be more enjoyable ways to use it.
References:
1. Shopping for Car Insurance, AAMI Fact Sheet, September 2008.
2. ING Australia, Attitudes Towards Life Insurance, December 2008.
Source: Macquarie Life 2011
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April 2011
