This post documents what it was like to buy life insurance in Sep 2024.

Part of the motivation for writing this post is the fact that the process has changed quite a bit since 2020, when I last bought life insurance.

Can't wait to see how bad life insurance is to buy in 2028.

TLDR; I bought $2.1m Life Cover + TPD (Own Occupation) on stepped premiums, with as much of it in Superannuation as possible, from OnePath via Lifebroker.

Historical Context

I bought life insurance in July 2020. At the time, the only insurer in Australia I could find who would sell me life insurance for a payout greater than $1.5m was Noble Oak.

I'd been paying annual premiums to them since then.

Starting again in 2024

My life insurance kept going up in price every year, and this time JQ mentioned that he'd recently bought life insurance for a lot less than what I was paying. I kicked off some shopping around.

I pursued two strategies in parallel:

1. Try to think of insurers and apply directly to them
2. Find a comparison site and look for other insurers

Strategy 1: Think Direct

I started by thinking of life insurers I knew and then checking if they allowed me to buy life insurance for more than $1.5m. Only one insurer resulted from this process, TAL.

Strategy 2: Via Comparison website (Broker)

I ended up looking at Compare The Market, which lets you look at a bunch of quotes and also passes your details on to an actual broker, which for life insurance is Life Broker.

Compare the Market (and Life Broker) provides quotes from three providers that willing to insure sums >$1.5m:

1. OnePath
2. TAL
3. MLC

Selecting an insurer : Onepath is the winner

So OnePath turns out to be the cheapest of the lot.

OnePath is an insurer whose life insurance policies are fully underwritten by Zurich.

Interestingly, OnePath has no direct acquisition channel, and only takes customers on via brokers. I'm not sure if this is related to their size, the size of the market, or possibly adverse selection issues.

Selecting a product

TLDR the product I got was:

1. Life Cover: For $2.1m, inside superannuation
2. TPD - Any Occupation: For $2.1m, inside superannuation
3. TPD - Own Occupation: For $2.1m, outside superannuation

All the policies are linked, no buyback option with stepped premiums.

Why I'm buying insurance

The first step in figuring out what product to get is to think about why you're buying something in the first place.

I realised I'm buying insurance so that my wife and kids will be alright if I suddenly can't earn an income. In that regard, it's a kind of income replacement product, aimed at ensuring that in the event I lose some (or all) of my ability to generate income, I can replace enough of my income for my wife and kids to be comfortable.

Note that this means that I don't have to replace my entire income. Instead, my need for coverage is tied to the duration over which we have dependents and the amount needed to ensure that my dependents are make it to adulthood.

Type of risks covered

Life insurance includes the following options that I was interested in:

1. Life Cover: Pays out when you die
2. Total and Permanent Disability (TPD) - Any Occupation: Pays out if you can't work any occupation
3. TPD - Own Occupation: Pays out if you can't work your own occupation

Note that these three are presented in order of increasing likelihood (i.e. you can't work any occupation if you're dead).

Given that I wanted something like income replacement, I ended up getting Life Cover + TPD - Own Occupation. The key logic there is that if I'm injured in a way that compromises my earning capacity, I'll get a payout.

Quantum of coverage

Then came the problem of estimating the amount.

I based my calculation on Patrick McKenzie's advice, which is usually very good:

“How much?” Depends on who you go through, your present health, your occupation (if you follow me yours will be cheap), and length of time you have it in force for, but rough order of magnitude is 1.5%~2% of your gross salary for benefits of 60% of it.

(Link to thread here)

I therefore did the following steps to calculate my coverage amount:

1. Calculate the annual expenditure needed to be covered: Set at 60% of pre-tax income as per patio11 tweet
2. Calculate the last year when you need insurance: This is the year my youngest child stops being a dependent (2044)
3. Assume a real interest rate: I used 2%. This is to specify real returns you expect to get on a lump sum that is paid out
4. Calculate the lumpsum you need: Use the NPV function in Excel to work out the lump sum you need that's equivalent to receiving the sum calculated in step 1 ever year, until the year calculated in step 2
   1. Doing this in excel allows me to calculate the lumpsum needed every year from now until 2044
5. Round up: Take the sum calculated in Step 4 and round it up.

I ended up with an insured sum of $2.1m.

Structuring the product

Ok, so I guess I should have gone out to get $2.1m of coverage for life cover + TPD (own occupation) - easy enough right? Wrong. This is Australia. Everything is unnecessarily complicated.

Optional extras

First of all, there are a bunch of options that I rejected. These are:

1. Linked or Standalone: I took a linked policy. Standalone policies allow you to claim separately for TPD or life insurance, with claims on one not affecting the payout limit on the other. Given that I calculated my need on a total basis ($2.1m), I took linked.
2. Buyback: This is an option to restore your life insurance cover amount if your TPD pays out, especially if there is a partial payout.

Using Superannuation to buy life insurance

Then comes the issue of using Superannuation, which is complicated enough that it needs its own section.

So you can buy life insurance through Superannuation. You may in fact already have some life insurance and TPD through Superannuation, which you were defaulted into when you joined your Super fund.

My default Super insurance was cancelled a long time ago. If you don't have dependents, it's not particularly helpful. Also, the coverage is pretty meagre if you're looking at something to actually cover your family.

With OnePath, it turns out that it's possible to structure part of your life insurance policy through Superannuation. If you recall the product offerings earlier:

1. Life Cover: You can get this through Superannuation
2. TPD - Any Occupation: You can get this through Superannuation
3. TPD - Own Occupation: You cannot get this through Superannuation

As a result, I ended up buying a policy where I have Superannuation based Life Cover + TPD - Any Occupation, with a linked non-Superannuation policy for the extra TPD - Own Occupation. Note that this is possible because TPD - Any Occupation covers a subset of worlds that are triggered under TPD - Own Occupation.

Consequences of using Superannuation

In case you're wondering why I did this, there are several consequences of using Superannuation to buy super including:

1. A 15% premium discount: OnePath provides a discount if you structure a policy through Superannuation
2. Pay premiums using Superannuation funds: You can pay your premiums using your Superannuation balance. Given the concessional taxation of Superannuation contributions, there is a tax advantage to paying for things using your Super balance.
3. Getting payouts out of Super may be complicated: Payouts for Superannuation-based policies go into your Superannuation account. Getting money turns out to be complicated:
   1. If I die: I'm fine, as long as my Super goes to a Superannuation dependent. (Otherwise, I get taxed on it) You can specify who gets your money using a binding Superannuation death benefit nomination.
   2. If I get injured so that I can't do my own occupation, but can still do other occupations: Then my TPD - Own occupation pays out, which is not Superannuation-based
   3. If I get injured and I can't do any occupation: Then it gets complicated. There is an annoying formula for how much you get taxed if you try to withdraw that money. The key variable to watch is that your tax goes up in proportion to the ratio of years you have worked/years you would have worked if you worked til you were 65. Of course, if you withdraw this once you're 65, then it's tax free again. If this seems extremely stupid, it is and you can read about it here.

Premium type

I was also offered the two traditional premium types:

1. Level premiums: These premiums are fixed and do not change over time. The premiums are therefore relatively expensive early on and relatively cheap later on
2. Stepped premiums: These premiums are adjusted for risk every year. Premiums go up every year as the risk of death/TPD generally goes up with age.

I chose stepped premiums because I want the ability to shop around and change insurer over time.

Interestingly, a consequence of working out the insured value I needed as the sum of money required to take my kids through their childhood, is that the required insured value declines over time. As time proceeds, there are fewer years of expenses that I need the insurance payout to cover.

This suggests that level premiums are also bad value because they lock me into a given quantum of coverage, when in fact I want coverage that declines in value over time.

The process of signing up

This process was a huge pain. It took repeated calls with the broker, who would relay issues to the life insurer involved and then get back to me. It was possible to do some of it over email, but the broker did require several portions to be done via phone.

The forms involved are extensive and also annoyingly invasive. I had to describe my medical history (understandable) but also my financial position including assets and income (less understandable, possibly adverse selection related).

Given my medical history I ended up with an exclusion for Bowel disease.

Cancelling my old insurance

Happily, cancelling your old insurance is pretty painless in NSW. I filled out a form and told my existing insurer about it. They had to refund me the portion of my annual premium that I'd paid that relates to the part of the year after cancellation.

Conclusion and next steps

So the I got $2.1m of cover, maximally through Super for Life and TPD - Own Occupation, all policies linked, with no buyback option on stepped premiums.

Future coverage

As mentioned before, the quantum of coverage I need should decline over time.

A consequence is that I'm likely to decline the offered annual CPI adjustment to my coverage and use inflation to erode my coverage over time.

The other factor that weighs on my decision making is that I could also save money/drive investment returns and eventually get to the point where I'd be willing to self-insure.

Shopping around next time

I won't be racing to do this activity again soon, but I will probably try shopping around for insurance again in a few years.

Some extra notes

Comparing the Channels using TAL

I would like to complain a little about the madness of the quote process.

First of all, the quote for insurance from TAL was more expensive in the direct channel, than it was via the broker. (I told this story to several people and they were somehow not surprised!)

Somehow the insurers haven't learn the lesson that the hotel chains have learnt, which is to ensure that the best price for your rooms is always available through the direct channel. Doing otherwise gives you a sugar hit in the short run (because Broker channels will have the most price elastic demand) but trains consumers to NOT check your direct channels in the long run. In the end, you end up killing your direct channel and devaluing your brand.

Secondly, I found out later that Life Broker, my broker, is itself owned by TAL. How does this work? TAL provides a better price to its brokerage arm than it does for direct sales, and then somehow doesn't come out as the cheapest/recommended insurer? This seems so silly.

How life insurance through super works mechanically

So what does it actually mean for standalone life insurance to be based in Superannuation?

The actual structure is that OnePath, my insurer, has an affiliated Superannuation fund (OneCare). OneCare creates an account for me, which has no investment options and exists solely to provide me with insurance coverage. OneCare then uses the rollover mechanism to pull my annual premium from my existing ART Superannuation account into my OneCare Superannuation account.

Amazingly complicated for something so simple.