As we go through life, most of us will experience that even the most well laid out plans can come unstuck. Often, we mitigate the risk of unexpected loss with insurances. We generally don’t think twice about insuring our car or home. But your greatest asset is actually you. It makes a lot of sense to make sure that you are also protected in case something goes wrong.
As we move through life, find a partner, raise a family, get a mortgage, start a business, the importance of insurance in a long-term plan increase. That’s because insurance is all about providing a financial safety net that helps you to take care of yourself and those you love when you need it the most.
As a financial adviser, I have seen first-hand the crucial role that insurances play when the unexpected strikes. I have dealt with multiple medical professionals who have been on long term partial income protection claims due to health conditions affecting their ability to practice. I have assisted clients with income protection claims in wide ranging issues such as depression to grief over the loss of a spouse.
An example that highlights the importance of insurance, was a young client of mine who was diagnosed with cancer. Initially they received a trauma payout which assisted with paying for the cancer treatment. Unfortunately, there were side effects from the chemotherapy treatment which resulted in a subsequent total and permanent disability claim. This payout allowed the client to clear all their debt and make significant renovations to their home. They have also been on long term income protection claim which has enabled them to meet their ongoing living expenses. Even though they suffered an awful health diagnosis, this did not negatively impact their financial goals. They were able to pay down debt, pay for their children’s education in elite private schools and continue to grow their superannuation for retirement. This was all made possible by having the appropriate insurances in place.
The role of insurance
Personal insurances form the contingency of any well thought out financial plan. By having the appropriate insurances in place helps to maximise your chances of achieving the goals addressed in your financial plan, even if you suffer an unexpected health event.
- It may mean that even if you are unable to work due to a bout of depression you can continue to reduce your debt repayments and meet living costs
- It may mean that the medical costs from battling cancer or some other unexpected illnesses do not erode your planned retirement savings
- It may mean that as the sole provider for your family, even if you are not around, your family are provided for financially.
- It may mean that if you are totally and permanently disabled because of an accident, you have the financial means to make the adjustments required in your life without financial stress.
No one can predict the future and what lies around the corner. Unforeseen tragedies such as illness, injury, or permanent disability or even death can leave you and your family facing tremendous emotional stress, and even grief. With insurance in place, you or your family’s financial stress will be decreased, and you can focus on recovery and rebuilding your lives.
Types of Insurance
There are range of personal insurances, these are the main ones you need to consider:
- Income protection cover
Income protection cover helps you meet your financial commitments by providing regular payments if you are unable to work due to sickness or injury. These policies can protect up to 75% of your pre-disability income up until age 65. The premiums for these policies are generally tax deductible and they is also the option to hold this type of cover inside superannuation.
- Trauma cover
Trauma cover provides you with a lump sum payment after the occurrence of a serious medical condition. There are approximately 30 to 40 conditions covered by trauma policies, although the bulk of claims are made on cancers, strokes and heart disease. Many policies require that you survive 14 days after a condition in order to be eligible for a payment.
- Total and Permanent Disability (TPD) Cover
TPD cover provides you with a lump sum payment if sickness or injury leaves you totally and permanently disabled. These policies have either an ‘any occupation’ or an ‘own occupation’ definition. An ‘any occupation’ policy will generally only pay the benefits if you are unable to work in any occupation, not necessarily the role you were working in prior to your disability. An ‘own occupation’ definition is a stronger definition and generally pays if your disability prevents you from working in the occupation you were working in prior to disability. There is also the option to hold this cover inside of superannuation.
- Life cover
Life Cover provides a lump sum payment in the event of your death or terminal illness. There is also the option to hold this cover inside of superannuation.
You can find further information on personal insurances on the Moneysmart site.
How much do I need?
Working out how much cover you need isn’t easy to work out, but engaging with an insurance professional can help you sort out your individual insurance cover. The actual amount of cover recommended will vary between individuals. There needs to be a discussion around what you want to happen in various scenarios such as inability to work or death of the primary income earner. These conversations are often raw and sobering but a necessary part of determining the appropriate amount of cover.
Several considerations that usually affect the cover required include:
- How much debt do the family have?
- Who is the primary income earner?
- How old are the children?
- What is the current standard of living and does that need to be maintained?
An insurance professional can recommend the best way to structure the cover factoring in things such as tax deductibility, taxation of benefits, superannuation release rules, cashflow and erosion of retirement benefits.
Just like investment risk appetite can change based on age and life-stage events, personal insurance cover should be examined to keep up to date with your changing situation throughout your lifetime. Having the appropriate cover in place leads to another intangible benefit…peace of mind.
My clients who put in place insurance cover, hope that they never have to call upon it. But if they do, they are always grateful they took the time to set it up properly.
Written by Alvin Wong