Financial planning is about more than just investing for the future. It’s also about protecting wealth.
The common belief that “it won’t happen to me” results in many people having a sound plan for wealth creation but not for protecting the very thing that generates wealth.
No matter how much expert advice you receive or how well you manage your finances, there is always a risk of serious illness, injury or death. Where that leaves you and your loved ones financially can depend on the insurance cover that you have in place.
Personal insurance can provide the money that you or your family need in critical times or if you can no longer earn an income. The money can be used to help with costs such as medical bills, loan repayments and living expenses.
Personal insurance can be owned directly or may be owned via superannuation. The following information applies if you own the insurance directly.
Life insurance
Life insurance pays a lump sum if you die or become terminally ill. A lump sum is paid to your beneficiaries or estate if you die. Beneficiaries can use the lump sum to repay debt, pay for children’s education or long-term care, or for any other purpose.
Life insurance policies that are owned directly generally have the following features:
- Premiums are not tax-deductible.
- In the event of death, the lump sum is paid tax-free to the nominated beneficiary.
- There are no restrictions on who can be nominated as a beneficiary.
- If a beneficiary is nominated, proceeds are paid directly to that person and bypass the estate.
Total and Permanent Disability (TPD) insurance
TPD insurance pays a lump sum if you suffer an illness or injury that prevents you from working again.
TPD insurance can provide cover based on your own occupation or any occupation. A person working in a specialist occupation may gain greater protection by choosing own occupation cover. TPD cover can be purchased based on a non-working or home duties definition if you aren't employed. A financial planner can help to determine what type of cover is most appropriate based on your circumstances.
Premiums on TPD policies that are owned directly are generally not tax-deductible. In the event of a claim, the proceeds will be paid directly to you (as the insured person) or your nominated beneficiary. The proceeds are generally only taxable if paid directly to someone other than the insured person or a near relative.
Income protection
Income protection, or salary continuance, provides a regular income if you cannot work due to sickness or injury. This type of insurance can be particularly important if you have living expenses and loan repayments that are reliant on your income.
Income protection provides a regular income when you can’t work. A waiting period usually applies before payments commence. You can generally choose a waiting period between 14 days and two years. Choosing a longer waiting period usually results in a lower premium.
Income protection policies usually pay up to 75% of income. If the policy covers an ‘agreed value’, the monthly payment is stated in the policy, which is the amount that will be paid if a claim is approved. ‘Indemnity value’ means the monthly payment amount will be determined when making a claim, generally based on up to 75% of the income earned before the claim.
While the cost of income protection premiums is generally tax deductible, policies that provide benefits of an income and capital nature are only deductible on the portion of the premium attributable to income benefits. In addition, a tax deduction can only be claimed for policies owned outside of super (other premiums are deductible to the super fund). Any income benefits you receive will form part of your taxable income in the event of a claim.
Trauma insurance
Trauma (or critical illness) insurance generally provides a lump sum upon diagnosis of a specified illness or injury.
Trauma insurance is designed to provide money to help you recover financially after a trauma or crisis, such as a heart attack, stroke, cancer or other life-threatening illness. The payment is made regardless of whether you can return to work and is designed to relieve financial pressure during great stress.
Premiums for trauma insurance cover are generally not tax deductible. In the event of a claim, the proceeds are generally paid tax-free.
Amount of cover
In determining the amount of insurance you need, consideration must be given to the potential loss resulting from various risks. Decisions need to be made about what risks can be retained, what risks can be avoided and what risks must be transferred. Insurance is essentially about transferring your losses to someone else (the insurance company) for a price.
Sometimes there is a trade-off between retaining part of a risk, such as being willing and able to cover the cost of excess and paying the cost of insurance. Therefore, in addition to addressing the potential risks, consideration also needs to be given to the cost of obtaining insurance cover.
The amount and types of cover that you need depend on your circumstances and objectives. It might include factors such as marital status, whether you have children, your budget, how much you want to provide for dependants and your levels of assets and debt.
Types of premiums
Personal insurance premiums can be structured as ‘stepped’ or ‘level’.
- Stepped premiums – are based on your age and increase each year. At younger ages, stepped premiums may be lower than level premiums, but stepped premiums can increase significantly as you age.
- Level premiums – are set at a fixed level for the life of your policy, although increases may still occur due to rises in rates, consumer price index (CPI) and policy fees. Level premiums may be more expensive than stepped premiums initially, but the total premium cost may be less if the policy is held for a long time.
Other things you should know
- Depending on your circumstances and health, an additional premium (known as a loading) may apply to your insurance cover. In some cases, the insurance company may apply an exclusion, which means the insurance will not be paid if the exclusion occurs.
- An insurance policy will lapse if premiums are not paid. Some life companies provide a short window of opportunity to pay premiums to maintain cover if the premium due date has been missed. If policy lapses and your health or circumstances have changed, it may impact your ability to get the same cover at the same premium.
- It is important to understand the benefits included in an insurance policy and optional extras. Benefits included are at no extra cost however optional extras may increase the premium.
-
If an insurance policy is owned by a superannuation fund or held for business purposes, the implications may differ from those outlined above.
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.
