The importance of life insurance
What’s more important: your car or your family?
It’s a silly question, yet most car owners will have some form of vehicle insurance whilst the under-insurance of our lives and health is substantial. A study conducted for the Investment and Financial Services Association (IFSA) found that 60% of Australian families with dependent children have insufficient life insurance cover to look after their family for a year in the event of death.
A report by Rice Warner found that, whilst most Australians have life insurance, the median level of cover was only $143,500; a substantial level of under-insurance. Further, only around one third of the working population have income protection cover.
Of course, many people think “it isn’t going to happen to me.” People are realistic enough to understand they could lose their home or car by accident but don’t seem to be able to make the jump to protecting their family finances in case of death or illness.
Are you gambling the future of your family?
Consider what life would be like for your family if you were unable to work or, worse still, if you were no longer around:
- Would they be able to stay in the family home?
- Would the children be able to continue at their current schools?
- Could the bills and other financial commitments be met?
- What would happen with your spouse’s working arrangements?
- Would extra child care be required?
Fortunately, with life insurance, you are able to insure against life’s unknowns and protect your family.
Life insurance falls into four broad categories
- Income cover: helps you meet your financial commitments by providing regular payments if you are unable to work due to sickness or injury.
- Trauma cover: provides you with a lump sum payment if you survive for 14 days after the occurrence of a serious medical condition (such as cancer, stroke or heart attack).
- Total and Permanent Disability (TPD) cover: provides you with a lump sum payment if sickness or injury leaves you totally and permanently disabled.
- Life cover: provides a lump sum payment in the event of death or terminal illness.
Let’s look at each one in detail…
Income Protection Insurance
Income protection policies provide income replacement if you are unable to work as a result of either sickness or injury.
A typical income protection policy pays a fixed monthly payment, usually 75% to 85% of your pre-tax income. These payments can be used to meet everyday living expenses such as mortgage repayments and other household costs. The amount of income replacement is decided at policy commencement.
Policies have a waiting period ranging between 14 days to two years. Generally, the longer the waiting period, the cheaper the premiums become. They can have a specified payout period of two or five years but generally are payable up to age 65, with some new policies being payable up to age 70.
There are important issues to consider when taking out Income Protection Insurance, which include: Own versus Any Occupation, Agreed Values versus Indemnity Values, and Stepped versus Level Premiums. All of these will influence the cost of the premiums.
Generally, Income Protection premiums are tax deductible. For example, if an annual premium is $5,000 and the client has a marginal tax rate of 47%, the real cost of the premium is $2,650.
Trauma Insurance
Trauma and critical illness insurance provide a benefit upon the initial diagnosis of a specified injury or illness. This benefit is generally a lump sum payment, which can be used at your discretion. Cover is limited to specific injuries and ailments. Ailments commonly covered by trauma insurance policies include heart attack, stroke, cancer and coronary artery disease.
Trauma insurance is an important consideration for anyone who doesn’t have a significant amount of extra money to call on if a traumatic health condition occurs. It might suit you if you are supporting a family or if you own a business.
It is advisable to consider having a lump sum benefit which covers your debts, including mortgage, estimated medical expenses and the amount of money required to fund your lifestyle whilst you are unable to work. We can assist in calculating an appropriate level of cover.
Premiums are not tax deductible, however, benefits are paid tax-free. An exception occurs where the trauma insurance is part of key person insurance.
Total and Permanent Disability Insurance (TPD)
Total and Permanent Disability cover pays out a lump sum if you become totally and permanently disabled.
Super funds are an attractive vehicle for TPD insurance as they can generally obtain a tax deduction for the insurance premium, meaning the member can effectively pay for cover using pre-tax dollars. However, this can be contentious due to access issues, particularly for self-employed people. This is an option to consider based on your circumstances. We can review this with you to assist with the decision.
Life Cover
Life cover provides a cash lump sum to your estate, or in accordance with your directions, if you die within the duration of your policy. The cash lump sum may also be advanced if you are diagnosed with a terminal illness and have less than 12 months to live.
For most clients in a wealth accumulation phase, holding life cover within a superannuation fund is beneficial. As with TPD, the super fund can generally obtain a tax deduction for the insurance premium.
Next steps
If you suspect you currently have insufficient insurance cover for you or your family, please contact us. We will help assess your insurance requirements with a short questionnaire regarding your personal circumstances, assets and liabilities, and health related issues.
We will then research the best policies for you and discuss the options available, including any exclusions and an estimate of the cost. We will also assist you to complete the application forms and arrange any medicals if required. If any issues arise that require following up, we will also liaise with the insurance underwriters to resolve these.
Thinking about exploring some type of life insurance for you and your family? Book a meeting with Mark directly.
IMPORTANT NOTICE
This blog post contains general information only and has been prepared by Allworths without reference to your objectives, financial situation or needs. Allworths cannot guarantee the accuracy, completeness or timeliness of the information contained here. By making this information available to you, we are not providing professional advice or recommendations. Before acting on any of the information contained here, you should seek professional advice. Allworths Wealth Management Pty Limited (AFSL 457 155) is the Wealth Management arm of Allworths Chartered Accountants. For further information, please contact us on (02) 9264 6733 or email growth@allworths.com.au.
