Risk management is an important part of any financial plan. In many cases personal insurance is the appropriate mechanism to limit the financial impact of unforeseen events.
Many of us recognise the sensibility of organising life insurance to provide a lump sum to assist family members carry on financially in the event of our premature death. However the burning question for those with dependants is exactly how much insurance cover is required?
However many people underestimate the pressure that can be placed on their financial position due to illness or injury. Being unable to work due to illness or injury, even if for just a short period of time, can place a large strain on your finances, making it difficult to meet regular living expenses, let alone continuing a savings regime or meeting debt obligations.
In a similar fashion, suffering a medical complaint such as a heart attack, stroke, cancer, major surgery or paralysis is traumatic enough without adding the financial pressure for medical care and family assistance.
Don’t put off personal insurance until it is too late!
When it comes to personal insurance some people pay the price of leaving it too late.
It is one thing to suffer an insurable event and have no insurance cover in place, but it is another to make the decision to obtain personal insurance only to find out that your health has deteriorated to the point where certain health conditions are excluded or insurance cover is declined.
Generally, the longer you leave it, the harder it will be to obtain.
While the general purpose of the various types of insurance may be easily apparent it is also a very complex area. Rarely are two insurance policies the same – different features, benefits and costs. Furthermore it is important to consider the ownership of such policies in terms of funding the premium and where the money goes in the event of a successful claim.
As a result, it is critical to obtain professional advice.
The following commentary is designed to provide a brief overview of the common types of personal insurance currently available in Australia. This material is not comprehensive and it is not complete.
Income Protection Insurance
Income protection insurance insures your greatest financial asset – your ability to earn an income. It is a means of insuring up to 75% of gross employment earnings in case you are unable to work due to an accident or sickness. The cost of income protection insurance (known as the premium) is fully tax deductible. Effectively, your premiums will be reduced by your marginal tax rate.
The income protection insurance policies available in the Australian market vary widely from the simple “no frills” policies to comprehensive full “bells and whistles” policies. In many cases it is a matter of designing the policy to suit – a tailor made approach.
Apart from the level of cover, there are two key considerations – the waiting period before a claim can be made and how long the insurance cover will last in the event of an ongoing insurable event.
Business Expense Cover
Business expense cover is usually an additional insurance within an income protection policy. The payment is designed to assist those running a business to cover fixed expenditure for a limited period, generally one year. The purpose of the insurance is to assist the business to continue in the event of a temporary illness or injury to the owner.
Life insurance provides a lump sum payment in the event of your premature death. The premium paid covers the life insured for the term of the policy, with the lump sum being payable to the owner of the policy or the nominated beneficiary in the event of death.
Life insurance is generally used to protect assets that are encumbered such as a family home. In the event of death sufficient funds are provided to pay out the loan. Another key use for life insurance is to provide financially for your family where the family balance sheet has not yet reached its full potential!
Ownership of the life insurance policy is a key consideration. For example, many Australians have life insurance attached to their superannuation benefits. The particular circumstances in each case determine the most appropriate method of ownership (and sometimes more than one policy is required to accommodate the potential scenarios).
Total and Permanent Disablement (TPD) Insurance
TPD insurance provides a lump sum in the event of the total and permanent disablement of the life insured. Whilst the definitions of disablement vary amongst insurance companies, the purpose of this type of cover is to provide a benefit to those who are no longer able to work as a result of an accident or medical condition.
It is common for TPD insurance to be linked to life insurance. Once again ownership is a key consideration.
Trauma insurance provides a lump sum payment in the event that the insured suffers one of a range of common pre-determined major medical conditions. The nature of the policy does not anticipate you to be permanently or temporarily unable to work nor is there an expectation that you will not survive the trauma.
The lump sum payment is often used to meet (additional) medical expenses, household expenses or even costly renovation or rehabilitation costs.
Business Succession & Key Person Insurance
For business owners, succession planning and business continuation is an important aspect of their financial planning. Unfortunately the often too familiar story goes that the business owner has had to wind-up the business when illness or injury strikes, or that the surviving business owners have had to sell business assets to meet inherited liabilities (or to buy out the interest of a deceased partner).
Personal insurance policies can be used to provide much needed funding to a business that is coping with the impact of losing a key employee. They can also be used to provide the necessary funding to facilitate the transfer of business interests to the complete satisfaction of all affected parties.
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