So, what are the different types of insurance that should be considered?
- Life insurance – provides a lump sum to your family or nominated beneficiaries should you die.
- Total and permanent disablement insurance (TPD) – provides a lump sum if you are permanently unable to work again.
- Trauma insurance – provides a lump sum upon diagnosis of a critical illness such as cancer, stroke or heart attack.
- Income protection insurance – provides ongoing income (up to 85 per cent of your employment related income, including superannuation) if you can’t work due to illness or injury.
Are you underinsured?
It’s not uncommon to underestimate the amount of money families require when insurance payouts become relevant. According to a recent report by actuaries Rice Warner, Australian families claiming a life insurance payout will on average only receive 42 per cent of the funds they require. The figures are even lower for TPD and Income protection cover. Can you believe existing TPD cover is only sufficient for about 14 per cent of the population and Income protection is marginally higher at 16 per cent (1).
What are the odds
It’s easy to be complacent when things are going well but it is important to ensure you are protected for the future.
- There is more than a 60% chance of being disabled for more than one month during your working life and a 1 in 3 chance of being disabled for more than 3 months (2).
- There are 60,000 strokes each year (an average of one every 10 minutes) (3).
- Around 108,000 new cases of cancer are diagnosed each year, (more than the capacity of the MCG) and there are 109 cancer related deaths every day(4).
Using superannuation to pay
In reality, insurance cover can be more affordable than you think, especially as you may be able to pay for some of the cover through your superannuation fund. This means cash flow concerns shouldn’t be a reason to remain underinsured.
The way you fund your insurance can be complex, with many issues to consider. For example, premiums on income protection insurance are tax deductible. So if you are on a high marginal tax rate, you might be better off holding this type of insurance outside your super.
While TPD is often held inside superannuation, specific advice must be sought regarding whether you choose “any” or “own” occupation. Although a lump sum will always be paid if you successfully make a claim, being able to access it prior to age 55 can be an issue.
Providing protection for your family is the cornerstone of a wealth creation plan. Implementing the right risk strategy is paramount.
Andrew, 40, is married with a young family, a $700,000 mortgage and earning $120,000 a year. He is well aware that if something were to happen to him, his wife Laura would face serious financial problems, so he sought financial advice. He had all sorts of questions. For instance, should he choose “own” or “any” occupation in his TPD policy, how would he access an insurance payout if it were in super and what kind of impact would having his insurance in super have on his overall savings?
With school fees, a mortgage and generally tight finances, Andrew could see it would suit him to split the policies with half in super and half outside. That way he could enjoy some added cash flow while still knowing his family would be covered. So he took life and TPD (“any” occupation) insurance with cover of $1.2 million apiece through his super fund paying level premiums and, trauma ($250,000) and income protection ($8000 a month) insurance outside the super environment, paying stepped premiums. And by bundling his products he could also enjoy lower premiums.
If you would like to discuss your insurance requirements, don’t hesitate to contact us at Beyond Bank Wealth Management on (08) 8132 9288 or leave a comment below
^John, General Manager, Professional Services.