Life Insurance Advice - Brisbane Financial Advisor
Why do I need life insurance?
Many of us like to bury our heads in the sand when it comes to planning for things like Life Insurance, Income protection insurance, Trauma insurance and TPD Insurance (Total & Permanent Disability). Yet, considering we insure our homes, our cars, our businesses, our possessions and even our pets, this doesn't make any sense! Personal insurances are designed to provide protection from the financial consequences of death or disability. They therefore form an important part of most financial plans. Your income will potentially be your biggest asset, so it's a good idea to insure it.
You probably think you’re adequately covered, yet if something were to happen to you, you might be in for an unpleasant surprise – and by then it might be too late. Research undertaken by Rice Warner in 2015 revealed that on average Australians had Life and Income Protection insurance meeting only 61% and 16% of their needs respectively. Cover for Total and Permanent Disability was as little as 13% of people’s needs. Should the unthinkable happen and you are not around to support your family or you are not able to work due to an accident - are you going to make sure that they are looked after?
This is when Life insurance, Income Protection Insurance, Trauma Insurance and TPD insurance is so important. When most people think about financial planning they tend to focus on the wealth creation side of things, but often forget about the wealth protection. Building a financial plan without adequate insurance is like building a house on flimsy foundations. Professional advice for insurance should be sought from a Financial planner; they are on top of current regulations and what insurance products will best suit you.
When these insurances are already attached to your superannuation policy they have the added benefits of being easy to set up and the payment automatically occurring.
You already understand how important it is to make your money work harder to ensure you are set up for a comfortable future. Do not let an accident unhinge all the planning and provisions you have set up!
Life cover is also called 'term life insurance' or 'death cover'. It pays a lump sum amount of money when you die. The money goes to the people you nominate as beneficiaries on the policy. If you haven't named a beneficiary, the super trustee or your estate decides where the money goes. If you have a partner or dependents, life insurance can help repay debt and cover living costs if you die.
Life cover may also come with terminal illness cover. This pays a lump sum if you're diagnosed with a terminal illness with a limited life expectancy.
How much life cover do you need?
To decide how much life cover to get, consider how much money you or your family would:
need — to pay the mortgage, credit cards and any other debts, child care, school fees and ongoing living expenses
receive — from super, savings, the sale of any investments, your paid leave balance, and support from your extended family.
While life cover covers you in case of death, Total and Permanent Disability (TPD) covers you if you are permanently disabled through sickness or injury.
If you are ill or injured and unlikely to be able to work again and meet the conditions of your particular policy, you receive a payment. The difficulty has always been to define what is meant by “unlikely to be able to work again”.
Advances in medical science and technology have meant that people who suffer horrific injuries might be rehabilitated and able to return to work, when years ago a similar condition would have left them permanently disabled. For instance, by-pass surgery once ended a working career; nowadays normal life can soon be resumed.
Different policies have different definitions and it’s an area where insurance companies are developing new features. It's always best to speak to a qualified Financial Advisor; someone who is educated on the terms and conditions insurance policies.
How much TPD cover do I need?
When deciding if you need TPD insurance, and how much, think about the expenses you'll need to cover if you were permanently disabled and unable to work.
These could include:
Living expenses for you and your family
Repaying debts such as a mortgage, a car loan or credit card
On going medical and rehabilitation costs
Modifications needed to your home
Equipment you will require
Savings you want for retirement
Total & Permanent Disablement Insurance
Income protection insurance pays part of your income if you're unable to work. At the heart of all income protection policies is the promise to pay the policy owner a regular benefit, usually 75% of their normal income, if they are unable to work due to accident or illness. Payments are made after an agreed waiting period and continue until either the policy owner is able to return to work, or until the end of the agreed benefit period.
Income Protection insurance can help pay the bills so you can focus on getting better.
Consider this - a 40-year-old currently earning $75,000 per annum with salary increases of 5% each consecutive year will earn over three and a half million dollars by the time she turns 65. When it’s put that way your income is certainly worth insuring!
It can be complicated to work out the technicalities of Income Protection policies, so your Financial Adviser is best placed to answer your questions and obtain the best policy for your needs.
Income Protection Insurance
According to an Australian Bureau of Statistics report published in September 2019, cancer is the most common cause of death in Australia accounting for more than 32,000 fatalities in 2018.
Incredibly, thousands of Australians are underinsured or have no insurance in place to cover the expenses caused by life-threatening illnesses. The grief experienced by family for loved ones suffering is often compounded by the costs associated with treatments forcing some to sell the family home to pay for extra time.
Trauma insurance, also known as ‘living insurance’ provides a lump sum payment in the event that you are diagnosed with, or suffer one of a range of traumatic conditions such as cancer, heart attack and stroke.
Medical advances have meant that our chances of surviving traumatic events are much better than in the past. However, the cost of treatment can sometimes be beyond your normal means. Without insurance cover, you may need to dip into your children’s education fund or your retirement savings; or you might even have to increase your mortgage to pay for expensive treatment.
The difference to income protection
Importantly, a trauma payment is not dependent on you being unfit to work (unlike income protection, where you need a doctor to certify your ongoing health). The diagnosis of a traumatic condition might mean that you physically could go to work, but would prefer to spend time with your family and reduce any work-related stress while you recover and consider how your future will be affected.
Trauma insurance can provide the financial support to allow this flexibility with your work arrangements.
You need to carefully compare the many variations of trauma policies available. There are significant variations in the features between policies such as the number and types of events covered, premium options and ancillary benefits payable. If you require assistance please contact your financial adviser to obtain the right policy for you.
The types of insurances considered here are limited to those that relate to a person's life. Specifically, it includes cover for death, total and permanent disability and temporary disability/illness (income protection).
Rather than owning one of these policies directly, you may be able to arrange for it to be owned by your super fund on your behalf. Here are a few key issues to consider:
Cash flow: Having your super fund pay your premiums can free up some of your cash flow for other pressing needs. But don't forget that the super fund deducts the premium from your account, so you'll eventually pay for it through a lower retirement benefit.
Flexibility: Your super fund probably offers one insurer only and the beneficiaries of the policy are limited to those allowed under superannuation laws. Personally held policies allow you to shop around for the best deal, and you have more flexibility to choose who to leave the money to.
Tax: Super funds can claim a deduction for premiums on death and permanent disability insurance held for their members (usually not available for these policies if held personally). However, tax issues are more likely to arise when these benefits are paid through a super fund in the event of claim. On the other hand, income protection insurance premiums are deductible when the policy is either held directly or in a super fund. If your marginal tax rate is higher than a super fund’s, then the tax benefit will be greater if the policy is held personally.
Payment rules: When claiming on insurance through a super fund, it is necessary to meet the insurer's policy rules as well as the super fund's rules and relevant legislative requirements. This is particularly important for disability and critical illness policies, as the money may be tied up in super until you retire depending on your super fund’s rules. Lump sum payments paid from a TPD policy held within a super fund cannot be made to the beneficiary unless and until that person satisfies a condition of release as defined in the legislation. This all but rules out the use of 'own occupation' TPD policies within super.
As from 1 July 2019, if a super fund hasn’t received any contributions for at least 16 months, any insurance held in the fund may be cancelled. You will need to advise your fund if you wish to continue to hold the insurance.
In some cases, it can be wise to have some insurance inside super and some outside. The best option for you will depend on your personal circumstances, so talk to us when considering any changes to your insurance arrangements.
How does insurance through super work?
Your licensed financial adviser can help you understand how to best manage the risks in your life. Make an appointment with Investment Zone to have a conversation about getting the right cover.