We put in place insurance for our homes, our furniture, our car, our holidays, and even our pets, but many of us ignore what funds these policies – which is our ability to work to generate income.
So, how do you protect your ability to work should unforeseen circumstances like a major illness or injury occurs?
Well, there are various types of cover that can be put in place to manage this risk, including life Insurance, total and permanent disability, trauma and income protection.
Like all things, policies are not the same, with the difference usually in the detail.
Some common mistakes.
1. Life Insurance policy – paid out on death
When you buy a policy where you are one of many, the pricing is very competitive and sometimes no upfront medicals are even required.
Everyone is accepted based on high-level data collection.
At the time of a claim, however, the policy issuer will normally require the completion of a much more detailed questionnaire.
At that point, if it is considered by them that there were potential issues at the time of issue that would have allowed the insurer to decline the application, they are at liberty to decline the payment when a claim is made.
And that is why it always pays to read the fine print before taking out any life insurance – or any other – policy.
2. Total and Permanent Disability (TPD) – own profession or any profession
A policy which covers any profession is cheaper, but for many people their capacity to earn a higher income is based on their speciality.
Being able to perform any work will not be either meaningful or financially rewarding for many people.
The payout for an “own profession” policy, on the other hand, at least goes some way to financial compensation if you are severely injured.
3. Income Protection – paid out when you are not receiving your normal wage or income due to an accident
With an income protection policy, there are two basic types being guaranteed, which are sum insured or secondly, based on income prior to the claim.
If you have the latter policy, the amount of payment can significantly fluctuate if you undertake seasonal work or your work load temporarily changes.
Costs can dramatically decrease the longer you are prepared to cover yourself without an insurance payout – that is, when the policy starts to pay.
Ask yourself how long could you survive without a steady pay-packet?
Unfortunately, for many Australians, this is measured in weeks rather than months.
Secondly, you must ask yourself what you want for your family if you are unable to work for a prolonged period of time.
When it comes to trauma policies, most insurers have materially different definitions for what constitutes an event that will allow a claim.
Unfortunately, even common words like heart attack do not have a common meaning so, under some trauma cover, a policy would be paid out, but unfortunately in others no payout would be made.
4. Tax deductibility
Life and TPD insurances would be tax deductible if the policies are within your superannuation – even if an SMSF – whereas they are not deductible if they are held outside of super.
For TPD to be deductible it must be for “any occupation”.
Income protection is deductible, whether in super or outside, but inside super the deduction is at 15 per cent and not your marginal tax rate if held outside – so clearly it is important to understand the impact of the deduction.
5. What is being insured?
Many people insure to a specific value to cover their debt.
There is not even a consideration for their biggest asset, which is their ongoing income.
Unfortunately, having no debt on the family home does not provide your family with income to live on and a government pension payment may not be enough for school fees, vacations and life’s little pleasures.
If insurance is paid for debt reduction on, say, investment properties, then your family could miss out on any Centrelink benefits due to the asset values.
When looking at the level of cover, therefore, you must consider both debt and lifestyle needs.
In many cases, it would be beneficial for the surviving spouse to either remain at home to raise children or to have the ability to hire in-home care if required.
Their need is to have choice over the longer term and, of course, while we do not want to financially gain from the death of a loved one or from a serious injury, money at least will help them get on with life.
We should all periodically review our insurance needs as our needs are not static and for most people, costs such as education and a growing family increase by much more than inflation.
So, when reviewing or considering insurance policies, you should consider the following checklist:
- What do I need to maintain a quality of life for me or my family?
- Do you understand the quality of cover (what is included and what is not included?)
- Do you know the amount of cover (the amount of benefit insured)?
- What is the cost of cover?
With this checklist, you will notice that cost (within reason) is last and quality is at the top.
It’s important that you talk to a good insurance strategist to determine the quality and value of the various insurance providers and to then match your needs.
Make sure this person is independent, so they are considering all policies, instead of ones which they may either be only allowed to offer or be receiving a disproportionate commission to recommend to you.
This article is general information only and is intended as educational material. Metropole Wealth Advisory nor its associated or related entitles, directors, officers or employees intend this material to be advice either actual or implied. You should not act on any of the above without first seeking specific advice taking into account your circumstances and objectives.
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