Personal Insurances

When someone mentions personal insurance whether that be life insurance, total & permanent disability insurance (TPD), critical illness (trauma) insurance or income protection insurance many will run for the hills as the perception of many is that personal insurance is a waste of money and if I did have a claim, it would not be paid.

The truth of the matter is that insurances are an important pillar of your financial wellbeing and that most legitimate claims are paid.

Insurance has a purpose and that purpose is to simply provide you, your partner and your family with financial protection should you suffer an injury or illness that resulted in a fatality, a permanent disability or a terminal illness.  A severe health issue or even a diagnosis of a illness can have significant financial impact on you and your family.  You can go from a situation where you and your family are comfortable to struggling.  The questions that you need to be asking yourself include:

• If I can no longer work because of health issues, can I maintain mortgage repayments and cover the day to day bills and costs that I currently incur?  If yes, for how long?
• How can I afford to repay any debts?  Do I have to sell assets to be able to repay debts?
• If I were to pass away, what does the financial position of my family look like?  Are they able to maintain current lifestyle?  Are the children able to continue to attend the same schools? Will my partner have enough assets to be comfortable in retirement?
• If I were to become totally and permanently disabled, how do we repay the debt, how do we cover the mortgage repayments, how do we afford the additional medical attention and potential caring costs now and into the future?

How many times do you hear on the news of a tragic accident where someone has passed away and left a family with virtually nothing.  A “go fund me” page may raise some money but it will never be enough.  You cannot rely on your parents to fund you and your family as they have their own retirement to fund.  Unless you win Tattslotto, insurance is the answer.  Insurance enables you to transfer the financial risk of something happening to you to a third party and it is this insurance that will financially protect you and your family.

Insurances should be taken out at the right stage of life and not all insurances are always appropriate for everyone.  Certain events during your life are milestone events that should prompt you to either obtain insurance or have any existing insurances reviewed.  Such life events would include:

• Buying a house and having a mortgage
• Marrying or living with your partner
• Having a child

Following is a brief description of the different forms of insurance and how they can be used to provide financial protection to you and your family:

1. Life Insurance

Life insurance provides financial protection for your partner and children in the event that you pass away prematurely.  Most life insurance policies will also include a terminal illness definition that allows you to access your life insurance in situations where you have been diagnosed with a terminal illness and the prognosis is that it is likely that you will pass away within a period of time defined within the policy (usually 12 months to 24 months depending on the insurer).  This terminal illness clause is important as it can give you and the family time to financially prepare for your death.

You should have life insurance if you have debts and if you have a family.  In general terms, the amount of cover should be at a minimum the amount of the debt.  The level of life insurance cover should cover debts, school fees and 10 years of your income replacement (after tax).  Ideally, you would also factor in an amount to ensure that your partner was able to maintain a comfortable lifestyle in retirement.

If you do not have a partner and/or your children are now adults then it is likely that you no longer need life insurance.

2. Total & Permanent Disability Insurance (TPD)

TPD insurance provides financial protection to you and your family in the event that you suffer an illness or injury that leaves you totally and permanently disabled and are unable to work.  TPD insurance may assist you and your family in covering medical and rehabilitation expenses together with ongoing day to day expenses.  Whether you are considered to be totally and permanently disabled will depend on the TPD definition that you are insured under.  There are three TPD definitions that you could be insured under and these are:

1. Own Occupation Definition

Own occupation TPD refers to a TPD policy that covers your inability to work in your usual occupation or your field of employment.  Generally this means the job you are currently working in.  You can make a claim on your policy even if you can work in a different field.

2. Any Occupation Definition

Any occupation TPD refers to a TPD policy that covers your inability to work in any job or role that is suited to your education, training and experience.

3. Activities of Daily Living (ADL) Definition

ADL include the following activities:

To make a claim you need to be unable to perform at least three of the five ADL set out above. 

TPD insurance is one of the more important forms of insurance as a TPD event could impact anyone, anytime.  Without sounding morbid, the reality is that a TPD event is financially worse than a death because you will have ongoing medical and carers costs to deal with for a number of years being the remaining lifespan of the affected person.  As such, we believe everyone should have a certain amount of TPD cover.  This includes those in their twenties who are just starting out in the work force, those who are single, those who are have partners and families and those who are coming to the end of their working life who are not yet debt free or financially independent.

3. Critical Illness (Trauma) Insurance

Critical illness insurance gives you a level of financial protection in the event that you become critically ill or injured.  A lump sum payment gives you the ability to access medical treatment (either in Australia or overseas), cover rehabilitation expenses and potentially reduce your hours of work to focus on your recovery.  In the event that your diagnosis was terminal, the lump sum payment could then be used to assist in creating lasting memories with your loved ones and perhaps being able to fulfil some of your “bucket list” items.

The main critical illness events that are covered include head trauma, stroke, heart attack and cancer.  There are many others listed in the policy but these are the major recurring basis on which claims are made.

4. Income Protection Insurance

Income protection insurance is important in that it will typically provide you with an income replacement of between 75% and 60% of your salary in the event that you are ill or injured and the recovery period is greater than your specified waiting period.  If you or a partner were off work for an extended period of time and unable to financially support your current lifestyle and household expenses then you should be looking at income protection as a means of financially protecting yourself (and your family).

You may buy a car or a house and one of the first things that you will do is make sure that you insure the car or house.  You do this because the car and/or house is a significant asset.  However, the question is how do you continue to afford to cover mortgage and cover day to day living expenses if you are unable to work.  As an example, ignoring the time value of money, if you are 35 years age and you intend to retire at age 65, if you suffer a debilitating illness or injury and can no longer work again you are forgoing 30 years of paid employment.  Without income protection you may receive Centrelink benefits but these will give you a very basic existence.  If you were earning $80,000 and you were to receive an income payment of 60% of your salary to age 65 this would represent a total pre-tax payment to you of $1.440m (being $48,000 x 30 years).  A more extreme example is if you are earning $180,000 per annum.  A 60% benefit payment would give you $108,000 pre-tax for 30 years or a total pre-tax payment over that period of $3.24m.  

Can you and/or your family afford to completely lose your salary?  In most cases the answer is a definite no.

5. Structuring Insurance

In general, the structure of the policy ownership will be dependent on three factors.  The first is cash flow, the second is the purpose of the insurance and the third is tax efficiency.

To preserve cash flow you may wish to structure the insurance policies in a manner that will minimise your personal cash outflow.  Where this is a priority you would structure the policy such that it is owned by a superannuation fund.  A superannuation fund can own and pay the premiums on the following insurances:

• Life insurance
• TPD (any occupation definition)
• TPD (Activities of Daily Living definition)
• Income Protection

The second reason relates to the purpose of the insurance.  For example, if the insurance is put in place as a result of a buy/sell agreement and succession plan arrangement then you may have the policy owned by the individual or the entity.  Where the insurance is purely personal and you have a spouse/de facto/partner then using a superannuation fund to own the policy is an option because the proceeds from the policy could pass to the spouse/de facto/partner tax free.  Where the beneficiaries are likely to be adult children then it is likely that the ownership of the policy would be better in the name of the individual as opposed to a superannuation fund.

The third factor to consider is tax efficiency.  Life and TPD insurance premiums are only tax deductible to a superannuation fund.  Income protection insurance premiums are tax deductible to you if you own the policy in your name and will also be tax deductible to a superannuation fund if the Fund is the owner of the policy.  However, as the individual is likely to have a higher annual tax rate on the last dollar of income derived, it is more tax efficient to hold the policy personally and claim the deduction in your own name. 

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Please contact us today if you would like to discuss your insurance needs or any other financial matter: contact our office.