This fact sheet provides additional information to help with understanding the investment, tax and other financial planning concepts that we have discussed with you or included in your Statement of Advice.
Please contact your adviser if there is any aspect on which you need further information or clarification.
Understanding Insurance
Maintaining appropriate insurance cover is a critical aspect of planning and protecting your financial future.
It can be uncomfortable thinking about how your family might be affected if you die, suffer a severe illness or become disabled. This discomfort sometimes means that people do not consider the financial consequences and plan accordingly.
Research conducted by Rice Warner in 2020 found that most Australians are underinsured, with the largest gap between required and actual insurance coverage found in parents of young children. These findings are concerning, considering the increasing level of household debt in Australia.
With the appropriate amount of insurance cover, you can protect yourself and your family by ensuring that you can clear your debts, make up for lost income, cover funeral costs or medical expenses, and pay for ongoing rehabilitation.
What is an appropriate amount of cover?
Insurance providers typically allow you to choose a level of cover and additional features or variations that reflects your specific needs.
For example, a 25-year-old single male with a mortgage and no children has different insurance needs than a 35-year-old man married with three children.
Multiple factors should be considered, including
- age of the insured person
- age of any dependents
- current asset base, including superannuation
- current debt levels
- ongoing family expenses and how these will be met, and
- significant future or contingent expenditures, such as funeral costs, education expenses, and medical bills.
If you do not earn an income, it remains essential to review your insurance needs.
Your contribution to activities such as home maintenance and childcare may be significantly affected if you suffer an illness or disability.
The financial consequences may be significant, as your partner may have to take unpaid leave to care for the household, or employ someone else.
Insurance Premiums
Insurance companies calculate premiums on factors such as your age, medical history, and smoking habits. They are also substantially influenced by your employment. For example, a copper miner would have a higher risk of being injured while at work than an office worker who spends most of the day indoors at a desk.
Most policies will offer the option of paying level or stepped premiums. Stepped premiums commence at a lower level than stepped, with the base cost rising each year. Eventually, the annual cost exceeds the level premium cost, and the cumulative cost some time after that.
Level premiums are therefore more attractive where the cover is expected to be in place for the long-term, while stepped premiums are used to cover short to medium term gaps.
Premiums may be indexed to inflation, referencing the consumer price index (CPI) or similar benchmarks. Therefore, the cost of premiums usually increases throughout the policy term, even if you elect to pay level rather than stepped premiums.
Types of Personal Insurance
Various types of insurance can help protect the financial future of you and your family:
- Life insurance
- Total and permanent disablement (TPD) insurance
- Trauma insurance
- Income protection insurance
Below we provide more information on each type of insurance.
Life Insurance
Life insurance is the most common type of insurance.
If the insured person dies or becomes terminally ill, the insurance company will pay the policyholder a lump sum, which can be used for any purpose but typically to clear debt and replace lost income.
Policyholders pay regular premiums to maintain life insurance cover. The insurance company calculates the cost of premiums using average life expectancy tables for the local population, medical history and a personal risk assessment.
In simple terms, the older the insured person, the higher the premium. If the insured person is a smoker or likes to participate in hazardous activities, the higher the risk and the higher the premium.
Life insurance policies will typically pay the benefit before death if the insured person receives a diagnosis of terminal illness with no chance of recovery.
Total and Permanent Disablement (TPD) Insurance
According to research conducted by General Reinsurance Life of Australia, the likelihood of an Australian between the ages of 35 and 65 suffering an illness or injury that will lead to total and permanent disablement is approximately 1 in 10.
Total and permanent disablement (TPD) insurance provides you with a lump sum if you become totally and permanently disabled and cannot earn an income. Policyholders can add TPD insurance to a term life policy or take it as a stand-alone cover.
The definition of TPD varies between insurers. Policyholders should examine policy conditions to ensure that the definition of TPD encompasses the circumstances the policyholder believes would prevent the insured person from working again.
There are two key definitions:
- "Own" occupation, where you are unable to work again in your own occupation
- "Any" occupation, where you are unable to work again in any occupation for which you are suited by education, training or experience
As with term life insurance, age, health, smoking habits, hazardous activities and occupation affect the premiums for TPD insurance.
When a medical professional has formed an opinion that the insured person will never be able to work again, the insurance provider may also arrange an examination of the case. The insurance company will then pay the TPD benefit amount if the insured person meets their definition of TPD.
Trauma insurance
An insurance company pays a trauma insurance benefit when the insured person is diagnosed with a “qualifying condition”.
Qualifying conditions are set out in the insurance policy, and definitions vary between insurance companies. Common qualifying medical conditions include:
- Heart attack
- Major head trauma
- Cancer
- Stroke
- Open heart surgery
A Trauma benefit is typically paid as a lump sum, once the insurer receives a certificate from a medical professional. Policyholders use the lump sum to cover lost income, medical and rehabilitation costs, as well as expenses such as mortgage repayments.
Significant trauma can affect you and your family’s physical and emotional wellbeing. A lump sum can help ease the stress during what is most likely to be a stressful time.
Income Protection Insurance
Experiencing even a temporary interruption to your income can have a devastating effect on your financial plans.
Income protection insurance pays a monthly income, generally up to 75% of your earned income, for a specified period or until you return to employment.
The benefit is paid on an ongoing basis, not as a lump sum, and is taxable as ordinary income.
The premium you pay is fully tax-deductible, and the cost of income protection insurance is influenced by:
- monthly benefit amount, which is based on your earned income. You must be employed (including self-employed) to be eligible.
- your occupation, with higher risk occupations translating to higher premiums
- waiting period, being the length of time you cannot work before the insurance company pays a benefit. Waiting periods vary from 14 days up to two years.
- benefit period, being the amount of time you will receive a benefit payment. The benefit period can range from one year to up to age 65.
The benefit period and waiting period you choose will depend on your situation, including how much sick, annual and long-service leave you have, along with accessible savings. The shorter the waiting period and longer the benefit period, the higher the premium.
Several policies may be combined in an insurance strategy to ensure full coverage.
For example, suppose you have an existing income protection policy within your corporate superannuation fund that has a benefit period of two years. To extend the benefit period, you might add an additional income protection policy with a two year waiting period and a benefit period up to age 65.
Insurance and Superannuation
Superannuation trustees may hold term life, TPD, trauma and income protection insurance through superannuation. However, it is not common for superannuation trustees to hold trauma insurance due to cashing restrictions.
The main implications of holding insurance inside superannuation, including in Group insurance policies, include:
Advantages
- Your superannuation balance may be used to fund premiums, freeing up non-superannuation cashflow
- The gross cost of premiums may be lower compared to holding the same policy outside superannuation.
- Group insurance premium rates may apply, which may be cheaper than individual premium rates.
Disadvantages
- Your superannuation balance, and retirement income, may be lower at retirement
- Processing and payment of claims may be lower than if held directly
- Tax may be payable, depending on your age, the age and dependent status of beneficiaries and the type of insurance benefit.
- Product features may be limited
- Death benefit beneficiaries are restricted
Multiple factors need to be considered when deciding how to structure your insurance cover, you should discuss this with your financial adviser prior to making any decisions.
Important Information
Walbrook Wealth Management is a trading name of Barbacane Advisors Pty Ltd (ABN 32 626 694 139; AFSL No. 512465). Barbacane Advisors Pty Ltd is authorised to provide financial services and advice. This post is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or needs, unless expressly indicated otherwise. You should consider whether the information is suitable for your circumstances and where uncertain, seek further professional advice. The author has based this communication on information from sources believed to be reliable at the time of its preparation. Despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice, and we are not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, we accept no liability for any loss or damage as a result of any reliance on this information.
