Is your most valuable asset your house, car, superannuation or other investments? You may be surprised to learn your most valuable asset is…. your ability to earn an income.
We don’t like to think about it, but what would happen if you were to die or had a serious illness or accident and couldn’t earn any income. How would you and your family cope financially?
- Do you have emergency funds or savings to call on?
- Do you have sick leave available from your employer?
- Would you be able to meet the home mortgage repayments?
- Would you have to rely on family or centrelink benefits to get by?
- Would your family have to drastically change their spending and lifestyle?
While it is important to save and build your wealth for the future, it is also essential to have a back up plan if something were to happen to protect your wealth. Just as you insure your house, car, and property against loss, so too should you ensure that you hold suitable personal insurance to protect you and your family against loss of income.
There are a few different types of personal insurance:
Income protection insurance, also referred to also as salary continuance is a benefit paid to you (usually monthly) to replace your income if you were to suffer a temporary illness or accident and not be able to work.
The maximum percentage of your salary that insurance will cover is 75%. You can choose the waiting period, and benefit period of your insurance. The waiting period starts from the time the doctor confirms your illness, and once you have served the waiting period and are still unable to work the benefits will be paid. Waiting periods can vary between 14, 30, 60, 90 days or 1 to 2 years. The shorter the waiting period, the higher the premiums.
The benefit period determines how long you will receive insurance benefits while you are unable to work. You can choose 2 to 5 years, or some insurers will offer cover until age 65. Your insurance benefits will cease at the end of this period, even if you are still unable to work. The longer the benefit period, the higher the premiums.
Premiums are affected by factors such as your age and smoking habits, and also affected by the type of work you do, e.g. blue colour versus white colour.
Income Protection cover can be held and paid within superannuation or owned by you and paid from your own cashflow. If the policy is owned by you and held outside of super generally the premiums are tax deductible.
Life insurance will pay a lump sum benefit to your nominated beneficiaries. Life insurance cover can be taken outside or inside of superannuation.
How much life insurance cover do I need? There are various formulas that can be used and most take into consideration your age, the age of your dependents, your current income and lifestyle, any debts including a mortgage, funeral costs and any legacy you wish to leave. There are some online calculators or you can work with an adviser to determine your specific needs.
The premiums for Life insurance are calculated based on the risk assessed by the insurance company. This is based on your age, sex, if you are a smoker or pursue hazardous leisure activities and the higher the risk, the higher the premiums.
Total permanent disablement insurance (TPD)
Total permanent disablement insurance (TPD) provides a lump sum to you if you were to have a serious illness or accident and are assessed by doctors as being permanently disabled and never able to work again.
TPD can be taken outside or inside of superannuation and cover is often “bundled” with Life cover. TPD cover can be provided for “own occupation” where your illness prevents you from working in your current job or for “any occupation” where you cannot work in any job.
Again, it is important to assess what level of cover is appropriate for you and your family.
Trauma or Criticial Illness Insurance
Trauma insurance pays a lump sum benefit to you if you experience one of the specified traumas in the insurance contract. There are usually between 20 to 30 ‘trauma events’ but the vast majority of policies cover major traumas such as cancer, heart attack, stroke, major burns, loss of limb, sight etc.
Trauma cover cannot be taken out within superannuation. The premiums for Trauma Insurance are again based on your age, sex, if you are a smoker or pursue hazardous leisure activities, and any pre-existing medical conditions.
This cover is like Income protection, but you receive a nominated lump sum instead of a monthly benefit. You may make a full recovery and only need limited time off work, but if your doctor certifies you as having a trauma event you will be paid the benefit.
You may have done the hard work building your assets, but an unexpected illness or accident can dramatically change your family’s financial circumstances if something were to happen to you.
It is important you consider having personal insurance cover, as the benefits include:
- It will replace your salary and protect your assets
- It gives you comfort and peace of mind that you and your family will be provided for
- It will allow you and your family to continue paying bills and any loans or debts without issue.
If you wish to learn more about the different types of insurance and what to consider when calculating what level of cover is appropriate for you, book an information session with me.