Most people consider life insurance for the first time when they get married, they have children or they get a mortgage and buy property. These events bring to the forefront the question of what happens when the breadwinner in a relationship is rendered unable to earn income: a family home may have to be sold, an investment property liquidated, cars downsized, children taken out of schools etc. The solution is life insurance. Life insurance products are an important part of a financial plan, because they can replace income if the policy-holder is no longer able to earn it.
Here are the different products that come under the umbrella of life insurance:
Death cover pays an agreed lump sum to a named beneficiary if the policy-holder dies. The policy should be enough to pay-out the debts accumulated during the breadwinner’s life: mortgage, car finance, credit cards, personal loans, margin lending accounts etc. The aim is to ensure the surviving beneficiary can live debt-free. There are death cover policies inside your superannuation fund, which are reasonably priced. These are ‘group cover’ policies that don’t entail detailed medical questionnaires or exams. A retail death cover product may entail a medical examination but it can have lower premiums (because you, personally are a lower risk than the general population) and it can be tailored more specifically to what you want. A death cover policy for $500,000, covering a 40 year-old non-smoking male, in a white collar job with a university degree, would cost around $30 per month.
Total & Permanent Disablement (TPD)
An accident may not result in death, but you could be left with permanent and severe injuries that incapacitate you. Once the medical opinion has been given in writing, that you cannot work again, the insurer pays-out a lump sum to the TPD policy beneficiary. This amount is generally used to pay-down some debt, pre-pay school fees, make alterations to the house and pay for specialist medical equipment associated with the disablement. TPD is complementary to death cover, and so it is usually bundled with your life insurance, bringing down the premium slightly and making it more convenient. A TPD policy of $500,000 linked to a death cover policy for $500,000, covering a 40 year-old non-smoking male, in a white collar job with a university degree, would cost around $60 per month.
Death cover and TPD are the most common life insurances but they don’t cover all risks to your income. Let’s say you are diagnosed with cancer or you suffer a mild stroke. This could mean a year or two not working, or not being able to work. However in both of these cases, you are still alive, so you can’t claim your death cover; and you are not permanently disabled because cancer patients can recover and mild stroke sufferers can be rehabilitated back into the workforce. If you have trauma cover, the insurer lists the illnesses on which – when diagnosed – they will pay the agreed lump sum. Typically, there is a ‘core’ list of 12 illnesses that Australian insurers will cover with trauma insurance:
- Benign tumour of the brain or spinal cord
- Chronic kidney failure
- Coronary artery bypass surgery
- Heart attack
- Loss of speech
- Major organ transplant
- Malignant cancer
In other words, serious, life-threatening events, diseases and illnesses that render you unable to earn income for a period. Insurers offer basic cover with the 12 major illnesses, and add-on many additional ones which then means a higher premium. This is one of the most-claimed upon life insurances, making it a relatively expensive one. It is also an essential insurance for a person carrying significant debt.
Income Protection Insurance
In your chosen occupation you may only be capable of producing income if you are a fit and well. An income protection policy pays up to 75 per cent of your normal salary in the event that an illness or injury incapacitates you for a period. Income protection premiums have a wide variation because each policy is tailored to the policy-holder. Premiums become lower the longer your agreed waiting period between the accident/illness and your first claim (ie. 14, 30 or 90 days). Your premiums rise the longer you elect the benefit to be paid to you; for instance, retail income protection policies generally pay-out until you reach 65 while the policies offered through superannuation funds are generally capped at two years. This type of insurance is virtually mandatory for self-employed people, and the premiums are tax-deductible. Bear in mind that self-employed people can only cover themselves to a formula of 75 per cent of the gross income attributable to their own efforts, less their expenses; and PAYG employees can cover themselves to 75 per cent of their gross salary, including super and packaged fringe benefits. Most policies have excluded professions, such as military, police, professional sports people. This is a valuable safety-net for most households’ wealth creation plans.
Insurance isn’t an exciting thing to think about, but when considering the alternative, it’s a conversation that should be had between you and your family. Your local Wealth Manager can help you understand your options.