Protecting What’s Important
“When it comes to insurance the old adage, ‘better safe than sorry’ rings true.
We don’t like to think about getting sick or even worse, the death of a loved one, but when these things happen, insurance can help alleviate some of the financial stress. Insurance is about managing risks so you can protect yourself, your loved ones and your lifestyle if the unexpected happens.
The tricky part can be figuring out your insurance needs and then how much you need to be insured for.”
Why you need life insurance
The day you’ve been waiting for has arrived; your brand new car is ready to take home. The first thing you do before driving it is get it insured. There’s no way you would risk anything happening to your new car!
This is a common scenario. Most of us don’t think twice about insuring our possessions, but what about protecting the most important asset – you? If you were in an accident and couldn’t work, how would you and your family afford your medical bills, on top of your mortgage and daily expenses?
While no-one expects to encounter misadventure, being prepared for adversity can help you protect against financial hardship. Insurance is an important part of any financial plan. In fact, wealth protection is often easier and cheaper than wealth creation. A comprehensive financial plan is as much about protecting wealth as it is growing it.
Life insurance is one of the best ways of protecting what’s most important to you. However understanding it all can be time consuming and complicated. Let’s simplify things and look at the basics.
The under-insurance epidemic
One of the biggest security threats facing Australians is the under-insurance epidemic. The majority of Australians simply don’t have sufficient cover. Even more alarming, many lack any cover at all. Consider the statistics:
• One in five families will be impacted by the death of a parent, a serious accident or illness that renders a parent unable to work;
• The typical Australian family will lose half or more of their income following a serious illness, injury or the loss of one of parent as a result of under-insurance;
• 95% of families do not have adequate levels of insurance; and
• Under-insurance is expected to cost the federal government $1.3 billion over the next 10 years.
These are sobering statistics, but the good news is that under-insurance can be overcome.Your financial adviser can help work out your insurance needs and how to structure premiums cost effectively.
The four main types of cover you need to know about
All of these insurances are commonly referred to as “life insurance” but each have their own place with respect to protecting your wealth and lifestyle.
Death Cover
Total & Permanent Disability Cover
Trauma Cover
Income Protection
DEATH COVER
Pays a lump sum benefit on death or terminal illness.
Can be used to eliminate debt and help with your family’s ongoing living expenses.
Suitable for:
People with dependents.
People who don’t earn an income but contribute to the running of the household e.g. non-working spouse.
How are my premiums paid:
Premiums are paid from either your bank account or super fund.
Is it tax deductible:
Yes, if paid via super you’re super fund will usually receive a 15% tax refund.
How much cover do I need:
Usually enough to pay off the family home plus a few years (5-10) worth of income for your spouse and children.
TOTAL AND PERMANENT DISABILITY (TPD) COVER
Pays a lump sum if you suffer a permanent disability (according to policy definitions) that prevents you from working.
Suitable for:
People with dependents
People with mortgages or other significant financial liabilities
How are my premiums paid:
Premiums are paid from either your bank account or super fund.
Is it tax deductible:
Yes, if paid via super you’re super fund will usually receive a 15% tax refund.
How much cover do I need:
Enough to pay off your mortgage and an additional medical expenses. You should also consider any additional amounts to fund your retirement and living expenses (if you don’t have income protection insurance as well).
TRAUMA OR CRITICAL ILLNESS COVER
Pays a lump sum upon diagnosis of a specified injury or illness
Cover is specific to a range of injuries and ailments such as heart attach, stroke, cancer (according to policy definitions).
Suitable for:
People with families or financial dependents, especially when only one spouse is working.
People who do’t earn an income but contribute to the running of the household e.g. non-working spouse.
How are my premiums paid:
You cannot pay these from super, therefore your bank account is the only way.
Is it tax deductible:
No, your trauma insurance is not tax deductible.
How much cover do I need:
A rule of thumb is to cover the average cost of a critical illness event which is $100,000.
INCOME PROTECTION
Replaces up to 75% of your gross annual income as a monthly payment if you are unable to work due to illness or injury.
You can nominate when payments commence and the period the benefit will be paid for.
Premiums are generally tax-deductible for most people.
Suitable for:
Families with dependents
Working singles
Self-employed individuals
How are my premiums paid:
It is usually advisable to pay for this via your bank account, however you can also pay via your super fund with a small portion being paid personally.
Is it tax deductible:
Yes, but your monthly income protection benefit is also taxed as income when you claim.
How much cover do I need:
Typically 75% of gross income and super. Most advisable benefit is to Age 65 (retirement!) and a 30 day benefit period is usually most suitable unless you have a large amount of savings. In this case, a 90-day waiting period may be more suitable.
Separating fact from fiction
MYTH NO. 1: THE INSURANCE VIA MY SUPER IS ENOUGH
Like most Australians, you’ve discovered your only life insurance is through your super. You may be surprised at how little this amount of cover actually is.
Research shows that almost half of industry super fund members are under insured by $100,000 for life cover and by $1,000 per month for income protection cover. These are frightening statistics when you consider that many Australians only hold their insurance through their super.
Your adviser can help assess whether your insurance needs are being met with your insurance through super.
MYTH NO. 2: INSURANCE PREMIUMS ARE EXPENSIVE
Did you know you may be able to take out insurance for what you pay for your morning coffee? The average nonsmoking 31 year-old male, married with two children and earning $75,000 p.a. can obtain $750,000 life cover and $100,000 trauma cover for around $2.80 a day!
What’s more, when insurance is arranged through super, premiums for income protection, life and TPD cover are generally tax deductible.
One way of making insurance premiums more affordable is to consider the difference between stepped premiums and level premiums. You can select either of these premium types when you purchase insurance:
• Stepped premiums are recalculated every year based on your age and the policy fee. Stepped premiums start lower and gradually get higher.
• Level premiums only increase when the policy fee or premium rates change. They start higher and generally don’t dramatically change over time.
MYTH NO. 3: I DON’T ENGAGE IN PAID WORK, SO I DON’T NEED INSURANCE
Some may think – ‘I’m a stay-at-home parent, I don’t need life insurance’. What most families don’t realise is if the homemaker wasn’t around, their family would require a lot of assistance – both emotionally and financially.
If your household was to lose its homemaker, the effects on the primary breadwinner could be devastating. When a homemaker dies or becomes disabled, their partner is often left with limited options. They may have to reduce their working hours to look after the household, or employ outside help. Either option requires additional funds.
Families losing stay-at-home parents may require more than $75,000 per year for child care or home help expenses.
MYTH NO. 4: I’M YOUNG, HEALTHY AND DEBT FREE - I DON’T NEED INSURANCE
Many people believe that insurance is for people with dependents and debts. However, if you consider that a young person’s most valuable asset is their ability to earn an income, it makes sense that insurance plays an integral part in their lives. While it’s true that a young, debt-free person may not need comprehensive insurance across all products, what would happen if they became ill or disabled and couldn’t work? Can they depend on their parents to bear the financial burden? This is when income protection, trauma insurance and TPD insurance become options to consider.
MYTH NO. 5: INSURANCE COMPANIES DON’T PAY WHEN THE TIME COMES
This is one of the biggest myths, with research showing life insurance companies have paid a total of $7.5 billion in 2017 alone. ASIC data also shows that 9 out of every 10 claims are paid by the insurers we use.