Life is full of unforeseen circumstances which can affect your plans. Life insurance may help you to meet your financial goals and obligations if you lose your ability to earn an income.
Why is life insurance so important?
Life insurance is there to provide you with protection against the financial impact of an event such as death, disablement, serious illness or injury. It shifts the financial burden from you to the insurance provider who can afford to protect you because of the pooled premiums paid by their customers.
What type of insurance is available?
There are a range of insurance options available that can be tailored to suit your needs and personal situation. The most common types of life insurance include:
In the event that you are unable to work due to illness or injury, income protection provides you with a monthly benefit. This is paid for an agreed period of time while you are unable to return to the workforce. The premiums that you will pay for this type of policy are generally tax deductible. However, any payments you receive as a result of this policy are classified as assessable income for tax purposes.
Life insurance helps alleviate the financial burden your family may be left with after your death. Usually paid as a lump sum, your dependants may use this money to assist with medical costs, funeral expenses or help secure their financial future. The cost depends on the amount of cover (age, gender and smoking status are also determining factors) you choose. The level of cover you have should be reviewed regularly to ensure it remains suitable. To make a decision on how much cover you require, you should consider the following:
- your children’s school fees
- services you would require if you were unable to care for your children, such as a nanny
- how much you would require to meet your day‑to‑day living expenses, and
- current liabilities, such as your mortgage.
Trauma (crisis) insurance cover
Trauma or crisis cover provides a lump sum payment to help people recover from a traumatic event such as a heart attack, cancer or stroke. This lump sum can be used to ease financial stress during a period of recuperation, where items such as home modifications and specialist medical attention may be incurred.
Do you need life, TPD or trauma insurance cover?
If you answer YES to any of the questions below, then you may need to consider life, TPD or trauma insurance cover:
- Do you have debts? Such as mortgage, credit cards, personal loans.
- Do you have dependants? You need to think about their ongoing needs such as education expenses.
- Do you have children from a previous marriage? Blended families tend to create more insurance needs.
- Are you in a relationship and are you both in paid work? If your household needs two incomes to maintain your mortgage repayments and existing lifestyle, then you should both have adequate insurance cover.
- Do you have dependent parents? Something we often overlook is our responsibility to help care for our ageing parents.
- Do you have loose ends which need tying up such as money owed to family or friends?
Do you need Income protection?
- Most of us insure our cars and houses, but we often don’t insure our most valuable asset – our income!
- A consistent income stream is the lifeblood of families and business. You can insure your income for a very small percentage of your annual income.
- If you answer NO to any of the questions below, then you may need to consider income protection:
- Are you wealthy enough to be able to survive without your income?
- Could you maintain your current lifestyle on social security (Centrelink) benefits?
- Will your accumulated sick leave cover you for a long-term illness? If you are self-employed you don’t have any sick leave!
- Could you maintain your superannuation contributions if you didn’t have an income?
John and Sally are 38 and 36 respectively. They have two children: Matthew aged eight and Sheree aged six. John is employed full-time as an architect and earns $70,000 pa, whilst Sally works part-time at a local nursery and earns $20,000 pa. They have a mortgage of $220,000 and a car loan of $20,000. Their only assets, apart from the house and car, are John’s super of $30,000 and $3,000 in a savings account.
Policies for John and Sally to consider include:
- An adequate level of life insurance cover for both John and Sally to ensure their debts will be paid upon either of their deaths (at least $240,000).
- Additional life insurance cover for John (possibly an additional $500,000 of cover) because he is the main income earner, so Sally would have sufficient funds for living costs, children’s education and household maintenance.
- Trauma insurance cover for both John and Sally to provide a lump sum to pay debts, house modifications and medical treatments should they suffer from a trauma event.
- TPD cover for both John and Sally to provide the funds required for repayment of debts, medical expenses and to fund retirement needs should they not be able to return to the workforce.
- John should obtain Income protection to cover 75 per cent of his income to ensure that they will be able to meet their day-to-day expenses. Because Sally works part-time she may not be eligible for income protection.
This information is of general nature only and is not intended as a personal advice. It does not take into account your particular investment objectives, financial situation and needs. Before making a financial decision you should assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. We recommend you consult a professional financial adviser who will assist you.