With the prospect that more Australians will live well into their 80s, planning for our future has never been more important. Compulsory superannuation provides a good head start, however it’s been said that this may not be enough to maintain the standard of living we see for ourselves.
Beyond superannuation, there are many avenues to help prepare us for our future, with life savings and life insurance being two common ones. The suitability of each will depend on your personal circumstances, though it’s important to know their strengths and understand their differences.
At a glance: life insurance (LI) and life savings (LS)
What is it?
LI: A life insurance policy provides a lump sum of money to a person or estate in the event of death or serious illness/injury. The amount of money paid will vary depending on the policy that is taken out.
LS: Life savings is simply the money that has been put aside from the household budget or other source, usually for a particular savings goal.
How much does it cost?
LI: Policyholders pay a monthly or yearly premium, much like car insurance. The premium is dependent on factors such as medical history, occupation, past claims and level of cover. As an example, the average cost for a non smoking Australian male aged 35 is $566 per annum*.
LS: According to the ABS, Australians currently save 9% of household net disposable income. Savings amounts will vary from person to person, and are dependent on the individual being able to save.
How much does it pay?
LI: The lump sum from life insurance payouts will vary across policies. For the average income earner with an appropriate level of cover, a payout is around $500,000 for life insurance, and around $5,000 for funeral insurance. For high-income earners payout amounts can be as high or exceed a $1.5 million lump sum
LS: Australian household savings have been rising steadily since hitting their lowest point during the GFC. A recent survey found 56% of Australians claim to have $10,000 or less in cash savings, while 16% have savings of between $10,000 and $30,000.
What do we use it for?
LI: A life insurance policy is used primarily to provide financial assistance to the dependants or estate of a policyholder. Used for mortgage repayments, replacing income, paying off debt and future expenses, it ensures you can maintain your lifestyle, while meeting your financial obligations.
LS: Savings is spent according to how the saver wishes to spend. A 2014 study from Money Smart found that of the people who do save, the majority spent on big-ticket items such as a house, or holidays for the family.
LI: By providing financial assistance when it’s needed the most, life insurance protects the lifestyle and assets you have created for yourself and family. The claim amount is tailored to the financial requirements of the policyholder, so you are afforded the choices you enjoy today, in the event of illness and injury in the future.
LS: Life savings provides the saver a choice in how they wish to spend their money. Savings are also readily available and can be accessed at any time.
Without knowing what lies ahead, good preparation now will mean greater certainty and options in the future. Savings and life insurance play a role in growing wealth and protecting it, respectively. As such, both should be considered as part of any robust financial plan.
What’s your biggest savings goal? Talk to your Financial Adviser to help you work out what's best for your life circumstances.
*TAL Life Insurance
ME Bank’s Household Financial Comfort Report
MoneySmart online 'Money Goals' poll July 2014. https://www.moneysmart.gov.au/managing-your-money/saving/how-australians-save-money