Just when you thought you had an empty nest and you start to think about all the wonderful things you would like to do in retirement.  Your job is complete; you raised a family and saw your children through to adulthood and financially independence.  But in an instant life changes.  A traumatic event occurs and one of your children becomes financially dependent on you once more.  But this time around, it’s not just your children who require financial support, it’s their kids and spouse may also require financial support.

The reality is that situations like this do occur not matter how unfortunate they are.  In planning for the future, it is important to assess all the potentials risks that may encumber your ability to fulfil your future plans.  An adult child becoming a financial dependant is one such risk and consideration should be given to this matter.

The simplest solution to mitigate this risk is through insurance.  A recent survey by the Investment and Financial Services Association (ISFA) however revealed that the average Australian family with young children is severely underinsured.  Their survey found that the average life insurance payout in Australia for 2008 was $ 91,000 and the average total and permanent disablement payout $.71,000.  The average Australian family with young children had total debt of $ 167,000.  Not only is the average insurance cover insufficient to cover debts, it does not provide provision for a lump-sum that can be invested and used to supplement the income lost from one spouse.

Insurance companies calculate insurance premiums based on expected risk and experienced claims of the people insured on their books.  As we grow older the statistical risk of an insurance claim increases and as such, so does the insurance premium payable to protect us against financial loss due to sickness, injury or death.  A further potential complication to obtaining insurance cover is past medical conditions or events.  Full medical disclosure is required when applying for insurance and any past or present medical condition or event may either lead to the cost of insurance being more expensive, exclusions placed on the policy, or potent decline of insurance cover.

Insurance can be structured under two different premium methods, ‘level’ premium and ‘stepped’ premium.  Under ‘level’ premiums, the cost of the year 1 premium is higher than under ‘stepped’ premiums (where the cost increases each year) however the policy cost remain relatively flat over the life over the policy under ‘level’ premiums.

Level premiums are therefore a cost effective long-term cost method of insurance cover.  Using an example, the cost of $ 500,000 in life insurance cover for a 30 y.o. male under level premiums is $552 p.a.  At age 50, the level premium taken out 20 years ago would still be approximately $ 552 p.a. however if the policy was taken out under ‘stepped’ premiums, the cost of the policy would have risen to approximately $1,100 p.a. by this time and continue to rise each year.

Paying for your children’s insurance cover is a bigger gift to them than they may initially realise.  They will appreciate the premiums that you pay for them but over time they will appreciate the importance of having obtained insurance while they are young where insurability was high and that you secured a long-term cost effective method to protect themselves and their family in the event of misfortune.

Paying the cost of insurance for your children is a valuable gift to both parent and child.  You will enjoy peace of mind that your children and their family will continue financially secure regardless of sickness, injury or death.  Furthermore, you have made an investment into your future, with the exception of the occasional babysitting and possibly a loan for a house deposit, you should be able to enjoy the rest of your life without having to worry about a potential obligation to financially support your children.