When you think of life insurance, the first thing that comes to mind is probably life term insurance — or the large payment that a surviving spouse receives upon the policyholder’s death. While that is one important type of coverage, there are other forms of insurance that should be considered when you are planning for your family’s financial future
In general, there are four types of life insurance coverage:
Life term insurance. This is the most common type of coverage purchased by individuals. As the name implies, it is insurance coverage that lasts for a defined term. To get this coverage, you generally must be in good health and pay a premium monthly or annually for as long as you have the policy. If you outlive the term of the policy, you can usually extend the coverage for an additional fee.
When the holder of a term life policy dies, the beneficiary — in most cases, a surviving spouse or children — receives a payment for the value of the policy. Some policies also include a provision that allows for the benefit to be paid when the policyholder is diagnosed with a terminal illness.
Total and permanent disability. The death of a wage-earner is not the only situation that can leave a family in financial need. If something such as an accident or illness happens that leaves you unable to work or function in your everyday life, total and permanent disability coverage provides a lump-sum payment to help cover your expenses. Many policies include a provision that the money is to be used to pay off any outstanding debts and loans. This is in addition to life term Insurance and is usually purchased in the same amount as that policy.
Trauma insurance. When something happens that leaves you injured and unable to work for a period of time, or you develop a serious illness, trauma insurance, also known as critical illness coverage, helps cover your expenses. It’s paid in one lump sum and is designed to pay for the medical costs associated with the accident or illness and cover other expenses incurred when you’re unable to work. Essentially, this type of insurance fills the gap between life term and total and permanent disability coverage. For example, if you are diagnosed with cancer and need to stop working while you receive treatment but plan to return to work in several months, you would not qualify for a payment from your life term or TPD policies. A trauma policy would then kick in to provide the necessary money. However, if you make a claim on a trauma policy, you can only do so once. In most cases, you then become uninsurable and unable to purchase any additional life insurance.
Income protection. Income protection insurance helps to replace your income in the event that you are temporarily unable to work due to an injury or illness. Most policies allow for a monthly payment of up to 75 percent of your salary when you make a claim; the actual amount depends on how much you earn and whether you purchased an indemnity or agreed value policy.
Accidental injury insurance. Not every injury is traumatic, but the expenses associated with accidents can easily add up. While your medical expenses may be covered, what about things like hiring extra help while you recover from a broken bone? Accidental injury insurance is a low-cost coverage that provides a lump-sum payment to cover expenses associated with an accidental injury.
When you are comparing your life coverage options, consider purchasing a combination of insurance types so your financial needs are met in the event that something goes wrong. In fact, purchasing a variety can save you money — and give you peace of mind that your loved ones will be provided for in the event something happens to you.
About the Author: A former insurance agent, Nicole Radman has worked with hundreds of families to secure their financial futures. She has used GIO Australia for her own family.