Hitting an insurance home run
Most people either cringe or yawn when the word insurance is mentioned but regardless of whether you find it scary or boring, managing risk is a necessity in the world in which we now live. Let’s cover all of the bases to help make your home run as easy as possible.
First Base – Income Protection
Considering that over 107,000 people in Australia made a workers’ compensation claim in 2017/18, what would your future look like if suddenly you were unable to work?
For most of us, the ability to earn an income is our most valuable asset. Depending on your age, your future income may well be worth far more than a house and its contents, a couple of cars, a boat or caravan all combined. Yet few people properly insure their income, and if illness or injury prevents them from working, financial hardship often results. With around half of us likely to spend more than three months off work due to ill health during our working lives, Income Protection insurance should be the first item on the personal insurance list.
Income Protection or Salary Continuance insurance can pay you a regular amount, usually up to 75% of your normal income if you are unable to work due to illness or injury. Benefits are taxable, and commence after a waiting period. Payments continue to be made until you return to work or until the benefit period expires. The waiting period and the benefit period are selected at the time of application.
Second Base – Life & Permanent Disability
Life Insurance pays a lump sum benefit if the policyholder dies. But what happens if they don’t die and can never return to work in their chosen occupation? Total and Permanent Disability (TPD) insurance can help ease the financial burden caused by loss of income by providing a lump sum payment.
Most people underestimate the level of life insurance they need. The insured sum should be enough to clear net debt, cover future expenses such as school fees, and provide an adequate replacement for the income that the deceased would have earned through to their normal retirement age. For a breadwinner with young children, an appropriate amount may be well in excess of $1 million. This cover is also important for primary care givers to ensure the children are properly cared for.
Third Base – Trauma Cover
Trauma Insurance fills a gap between Income Protection, Life and TPD Insurance. It was designed by a doctor who found that his patients’ recoveries were hampered by their concerns over the financial burden caused by major illness. Trauma Insurance pays a lump sum benefit on the occurrence of a specified condition such as cancer, heart attack or stroke, which can strike at any age. It often provides a benefit when neither Income Protection nor TPD Insurance claims can be made.
Unlike Income Protection, where the benefit is paid if you are unable to work regardless of the nature of the illness, trauma payments are based upon the specific illness, not the degree of disability.
Trauma Insurance is designed to cover out-of-pocket medical expenses and other costs associated with major illness, and to allow recovery to take place without financial worry. It isn’t a replacement for the other types of personal insurance. A comprehensive insurance portfolio will include Life, TPD, Income Protection and Trauma Insurance.
Home Base – General Insurance
Most people insure their house and contents, motor vehicles and other possessions. The key here is to make sure that all possessions are covered for full replacement value. Insurance companies provide guides on their websites to determine an appropriate level of cover. Don’t forget valuables like jewellery, antiques or artwork, which often have to be separately noted in the cover.
A super way to insure
Most superannuation funds (and all industry funds) offer Life and Permanent Disability Insurance.
There are a number of advantages in holding life insurance inside your super fund.
Super funds can often negotiate wholesale insurance rates, so premiums for their life insurance are often lower than can otherwise be obtained as an individual. In addition, premiums are paid from your superannuation balance. Whilst this reduces your ultimate retirement benefit, the relative effect is usually small, and by relieving the strain on the household budget, you may be able to increase your overall savings. The main advantage of insurance held in super is that the premiums are tax-deductible to the fund, which ultimately reduces your cost of insurance.
When you join a superannuation fund you may be offered a minimum level of insurance. This is rarely enough to provide adequate cover and it’s up to you to request an appropriate level. Depending on your age, medical history and the level of cover you require, you may also need to undergo a medical examination
When leaving a superannuation fund you should find out what happens to your insurance cover. You may be offered a “continuation option”, which is an ongoing policy provided by the insurance company. If you don’t take this up within the period that the offer covers, you may find yourself without insurance. If this happens, and if there has been a change in your health, it may be difficult and cost much more to obtain replacement cover in the future.
From 1 July 2019, to ensure that super balances aren’t unnecessarily eroded by insurance premiums, if your superannuation account receives no contributions for 16 consecutive months, it is deemed to be inactive and any insurance held in the fund will be cancelled unless you notify the fund that you wish to retain the insurance.