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4 key questions to get your insurance right

Christine St Anne
1 February 2016

After using ASIC’s Money Health Check app, I was somewhat relieved that most of my finances are under control. However, one area of concern was insurance cover like income protection.

While I will be paying off my comprehensive car insurance in a few weeks time, I never really gave a thought to personal insurance such as income protection. Like many people, we take the time to insurance the big items like cars and our home but never our income!

The ASIC app certainly prompted me into action and after asking myself some key questions insurance is one of my financial to-do’s for 2016!

1. How much cover is enough

As a member of a superannuation fund, I already have total and permanent disability (TPD) insurance.

The most obvious question is whether this cover is adequate.

My colleague and Switzer Expert Penny Pryor explores this question in detail in her excellent article, The insurance cover you didn’t even know. Basically the cover depends on you liabilities, assets and dependents.

My industry superannuation fund has an insurance calculator, which assesses your needs and even provided me a detail cost analysis of the extra cover that I needed.  It certainly got me thinking about other types of cover such as income protection.  Given that I rely on my income to pay the bills and mortgage, if I ever am injured or suffer from prolonged illness, it is comforting to know that my income will be insured. This got me thinking about other types of personal insurance cover on offer, which leads us to the next question.

2. Do I need more than one insurance cover?

Another big question is whether other types of insurance cover should be considered.

Firstly, let’s look at the different types of insurance on offer which was put together kindly by the Switzer Financial Planning team.

There are four types of personal insurance cover to consider with each cover providing a specific purpose and benefit.

  • Life cover – provides a benefit if you die or, in most cases, if you are diagnosed with a terminal illness. This cover will provide a benefit for your family to use to possibly repay debts, meet any final medical bills and estate costs and provide a lump sum that can generate an ongoing income.
  • TPD as highlighted earlier. This cover provides you with a benefit if you are permanently disabled. This will cover you for debts, home modifications and ongoing care
  • Trauma or critical illness cover – This insurance provides a benefit if you are suffering a specific medial condition such as a heart attack or cancer. With modern medicines, it is likely you will survive an illnesses or major trauma like a heart attack. However, with progress comes the high cost of ongoing treatment and the need to have sufficient funds available to meet these costs.
  • Income protection or salary continuance – your most important asset is usually your ability to earn an income and this type of insurance will replace a major portion of your income if you are off work for a long period of time due to an illness or injury.

So should one look at buying the whole kit and caboodle? If you are concerned about all life events than you could look at buying them all! However, it is probably more prudent to prioritise and assess what cover is more relevant to you.

TPD insurance and income protection could actually work effectively together.

For people taking out trauma cover it is expected they will eventually return to work, however TPD as the name suggests means you are permanently incapacitated and therefore won’t be able to return to work.

TPD will only be paid after medical professionals assess your condition and determine whether you can in fact return to work. In the meantime people are faced with ongoing medical bills and loss of income.

This is where income protection can play a role. As noted earlier, income protection effectively pays an income stream therefore you can use this type of insurance to pay any ongoing costs during that waiting period.

3. What are the finer details?

The Switzer Financial Planning team have highlighted a number of issues when looking at the finer detail in the various insurance policies.

It is important to note that three of the four types of insurance (Life, TPD and Trauma) are paid out as a lump sum. Income protection is paid out as 75% of your income (some insurer offer 80%) for a maximum period, say two years or to age 55, 60 or even in some cases 70. So it is effectively an income stream as opposed to a lump sum benefit.

Many people tend to consider trauma or critical illness cover given the likelihood of events such as a heart attack.  It is important to note, however, that advances in medicine and treatment can impact on the specific cover you have taken with this type of insurance.

For example, many older policies cover people for open-heart surgery; however, the new treatment is now keyhole surgery making those older policies void! It is therefore crucial you revise this cover to keep in step with medical advances.

4. Should I hold insurance in my superannuation fund?

Life cover, income protection and TPD cover can be held in your superannuation but not trauma or critical illness cover. An income protection cover held in your super is allowed to pay out the benefit directly to you.

Holding insurance within your superannuation can also provide you with tax benefits.

If the cover is held in your name, your life insurance and TPD premiums inside of super can be deductible to the fund. Premiums for income protection are deductible both in and outside of your superannuation.  

For members of large superannuation funds, premiums tend to be cheaper given that larger funds can negotiate cheaper deals with the insurance providers.

Finally it is important to note that given the complexity of what is on offer, insurance is an area where advice is needed – so make sure you talk to someone in-the-know to ensure you have the right cover for 2016 and beyond!

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