The common belief that “it won’t happen to me” often results in many people having a sound plan for wealth creation, but not an adequate plan to protect the very thing that generates the wealth – themselves! How death, disability or illness affects your ability (or your family’s ability) to realise your lifestyle goals and objectives depends on the wealth protection strategy you have in place. By taking out insurance you can provide some financial protection for your family’s personal needs. Insurance can be structured to provide for such things as the repayment of your debts upon death or disability, financial assistance for dependants, and protection against the loss of income.
Term Life insurance
What would happen if you were to die today? How will your family cope? Will they be able to maintain a similar lifestyle they have now or will they have to change their home and school besides dealing with the grief of losing a loved one?
Term Life insurance provides a lump sum amount paid to beneficiaries on the death of the insured or to the insured if they are terminally ill and have less than 24 months to live. The amount paid is agreed to at the time a policy is taken out and normally involves a sum which covers the liabilities which your income would have supported such as mortgage, living expenses for your family, education costs for your children etc.
Total and Permanent Disablement Cover
If you were totally and permanently disabled, what changes would you have to make to your house? Would your savings be enough to cover the cost of a carer if you do not have a family member who could take up the responsibility?
Total and permanent disability (TPD) cover provides for the payment of a lump sum benefit to the policy owner in the event you become totally and permanently disabled. Whilst TPD can be taken out as a separate cover, it is generally an extension of another type of cover such as a Term life or Trauma policy.
There are different definitions of TPD available and the premiums vary accordingly. Own Occupation definition is where the insured must show that the disability prevents them from working in their own occupation which they disclosed when applying for the cover. It however may only be available to individuals in certain occupations.
Any Occupation definition is a bit more onerous as the insured must show that due to the disability, they are unable to work in their usual, or any other occupation for which they are reasonably suited by their education, training or experience. This option is often the cheaper option; however, it can be more difficult to meet the requirements of this type of disability definition.
Trauma insurance will pay you a specified amount in the event that you are diagnosed with any of the medical conditions or injuries, listed under the policy. For example, a payment would be made if you were diagnosed with cancer, suffered a heart attack or a stroke. This payment is made regardless of whether you are able to resume work and is designed to provide the time and financial assistance for treatment.
If you fell ill or were injured tomorrow, would this impact our ability to earn an income? Once your sick leave and annual leave has been used up, how long will you be able to meet your current expenses such as rent or mortgage and utilities?
Income protection or salary continuance provides a monthly benefit to replace a portion of the income lost when the insured person is unable to work at their full capacity due to sickness or injury. Most insurance companies will insure up to 75% of the income earned though some will even consider up to 80%. Some will include 100% of the superannuation payments you may have been receiving as well.
The policy will have a waiting (when the benefit payments under the Policy will commence) and a benefit period (what is the maximum length of time the benefits will be paid for). Premiums will increase if you have a lower waiting period and longer benefit period.
Inside super or not?
Some insurance policies can be owned through your superannuation fund which could help with being protected without impacting your personal cashflow. However, there are tax considerations and superannuation rules which need to be kept in mind. Whether it is held through your super or in your name, you need to assess the pros and cons and go through the product disclosure statement. Your adviser can assist you with this besides finding you the policy which suits you best.
This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.