There are many different types of life insurance. One of the most common questions we are asked is ‘who needs what’ kind of cover. In this article, we will examine each of the major types of life insurance and give our opinion as to who needs to take out this form of cover.
As the name suggests, death cover is an insurance policy that pays an amount of money to your nominated beneficiaries if you die while you hold the policy.
The key here is who your beneficiaries would be. The most common beneficiaries are partners and children. However, the range of potential beneficiaries is broader than this.
Put simply, if one or more people would suffer financially if you die, you should have death cover. For example, if you are a parent of younger children, then dying would create a financial impact for those children. This is the case even if you are not working in paid employment. If you are a carer for children, and you die, alternative care arrangements will need to be established.
Sometimes, younger couples establish death cover later than they should. Basically, if you are contemplating having children, you should take out death cover. It is not unknown for a person to die in the early stages of their partner’s pregnancy. Taking out death cover before pregnancy can happen is always a good idea.
Partners and children are not the only people who may be financially dependent upon us. Adult siblings or even our elderly parents might rely on us for financial support. If that is the case, taking out death cover may have a significant positive impact on those people.
Total and permanent disability cover (‘TPD’)
TPD pays a benefit if you become ill or injured and are unable to work. As a starting point, anybody who needs death cover should also take out TPD. For this reason, death cover and TPD are often bundled together by insurers.
That said, the range of people who should consider TPD is a little bit broader than the range of people who should consider death cover. This is because there is one extra potential beneficiary of a TPD policy: you. While you can never be the beneficiary of your own death cover, you can certainly be the beneficiary of your own TPD cover. And if you have been disabled such that you cannot work, you will definitely need some alternative financial support.
So, in a nutshell, any person with financial dependents or any person who would personally suffer financially if they became disabled and unable to work should have TPD cover.
The same goes for income protection cover. Income protection policies do not require you to be permanently disabled before you can access a benefit. So, if you or any other person rely on your ability to generate income, you should insure that income via an income protection policy.
Occasionally, we are asked about the difference between TPD and income protection. In many ways, the difference lies in the name: to access a benefit under a TPD policy, you need to be totally and permanently disabled. With income protection, the illness or injury can be temporary – providing the illness or injury leaves you unable to work, you can claim a benefit. So, while there can be some ‘crossover’ between these two forms of insurance, they also insure for slightly different things. For that reason, people who need one should generally take out the other.
Trauma cover pays a lump sum benefit in the event that a specified traumatic event occurs. Trauma cover is a good idea for people who would not have the means to pay for things such as medical expenses associated with one or more of the specified illnesses or injuries. Whenever paying for these things would be financially difficult, trauma cover may be warranted.
Once again, there can be some ‘crossover’ between trauma cover and one or both of income protection and TPD. However, it is possible for a traumatic illness or injury to be experienced that does not give rise to a claim under an income protection or TPD policy. For that reason, many people choose to take out trauma cover in addition to the other types of insurance.