Guide To Insurance

As we get older our responsibilities grow. Car repayments, mortgages, kids, education fees and a relentless cycle of bills. The people we love most depend on us and our income for survival. If you are the main income earner, it can be a shuddering thought to think of what would happen to your family if you died, suffered a serious illness or injury and could no longer work. In these circumstances unfortunately, the bills keep coming or even multiply. For this reason, personal insurance is vitally important. It can ensure stability and security for your family in the event of a life changing incident. Insurance provides financial support for when life hasn’t gone to plan, it can guarantee your family’s financial security.

Personal risk insurance can provide you with peace of mind. It transfers the financial burden to the insurance company in the event certain life changing incidents occur such as a terminal illness/ death, trauma or total and permanent disability.  

Do I need personal insurance?

Yes. It is very unlikely that you would not need any type of cover; if you have any debt, your income is relied upon to pay household bills or you have dependents, then you require personal insurance. The more relevant question is what type(s) of personal insurance do I need?

What type of personal insurance do I need?

Limiting risk is the goal of taking out personal insurance.   When researching the different types of insurance, it is essential to think about your risk profile and personal circumstances. The type of cover you need should be based on your level of debt, your family situation and your type of profession. It is important to discuss your options with an expert such as a Certified Financial Planner as they can guide you to make the best decision for you and your family. There are four main types of cover:

• Life (also known as death cover) – This cover pays a lump sum upon your death or the diagnosis of a terminal illness. Life insurance provides financial security for your dependents and can be used to pay out your mortgage, provide an investment sum or income stream for your family or fund the sale of a business. The cost depends on the level of cover you purchase. The premiums can be paid personally or through super fund. Your nominated beneficiaries are paid the benefit; it can go to a spouse, child, family member, organization, trust or a combination of the before mentioned.
• Total Permanent Disability (TPD) – This type of cover pays a lump sum if you become totally and permanently disabled and are unlikely to work again in a job which you are reasonably qualified for by experience, education and training. It can be used to pay debts, medical expenses or provide for your dependents. Likewise, it can be used to fund the sale of a business if the owner should become disabled. This type of cover can also be paid personally or through superannuation.
• Income Protection (also known as salary continuance) – Income protection insurance replaces your income if you cannot work due to injury or illness. It insures 75% of your income up to the age of 65. This is usually not for short-term protection; it is about protecting your earning capacity in the long-term. Any payments you receive from an income protection policy are classified as assessable income for tax purposes. You are generally able use the premiums as a tax deduction. When taking out this type of insurance it is important to note that there are usually waiting periods for receiving benefits. These can range from two weeks to more than a year and depend on what you select when you sign up for the policy. Longer waiting periods generally result in smaller policy costs.
• Trauma (or critical illness) – This type of insurance provides a lump sum payment if you are diagnosed with a serious illness such as cancer or coronary disease. The benefit is paid when the diagnosis is confirmed, the lump sum can be used however you want or need. It can be used to pay off your debts, fund medical expenses or allow you time to focus on your family and recovery during what would be a trying time.

What factors will affect my insurance premiums?

A premium is the amount you pay for your insurance. It differs for each policy holder and is calculated taking into consideration a number of elements:

• Age
• Gender
• Smoking status
• Your health (including pre-existing conditions)
• Which life insurance company you select (each have different base rates on offer)
• The type of premium you choose
• Add-ons (you may wish to select additional policy options at a cost)

When should I take out life insurance?

It is commonplace for people to take out life insurance around significant life events such as purchasing a home, getting married or beginning a family. However, the sooner the better. Once you are eligible, are 18 or have started your career, is a beneficial time to take out personal insurance. Your health status can deteriorate at any time, but generally the younger you are the healthier you are. Your health status affects your premiums/costs.

How much cover do I require?

The short answer to this question is it depends.   It depends on your personal and financial circumstances. When choosing what types of insurances and what level of cover you require it is important to consider what ongoing financial commitments you have, namely:

• Living expenses (food, household bills, social life)
• Debt (cars, mortgages, credit cards, personal loans)
• Future expenses (kid’s education)
• Any future benefit/ inheritance you would like to leave for your children

It is crucial to find a balance between the level of cover, the cost of the premium you pay and what you can afford. Taking out insurance that is paid through your super is a helpful way of balancing these. It is important to seek professional advice to identify the best solution for you and your family.

What else should I know about personal insurance?

The quality of a policy is crucial. There are many different types of covers and levels of cover. The quality of a policy is extremely important when choosing the right policy for your circumstance. Cheapest is not necessarily the best. Do your research. Know what each policy covers and decide which is the greatest match for your personal and financial situation.

There are differing tax implications depending on what policy you take out in different ownership structures. Talk to your financial planner about this when selecting the best policy for you.

Who should I consult about personal insurance?

It is recommended that you see a CERTIFIED FINANCIAL PLANNER™ professional. CFP® professionals have an ethical obligation to act in your interest. Be apprehensive of those who call themselves Financial Planners but who seem more interested in pushing their own agenda and products at the expense of your specific needs.

Singleton Financial Planning’s principal, Elliot Watson, is an award winning CERTIFIED FINANCIAL PLANNER™ (CFP®) and gets immense satisfaction from helping clients achieve their financial goals and security. He is dedicated to developing strong relationships with his clients built on a foundation of open and honest communication.
If you would like help reaching your financial goals, contact Elliot on 1300 713 733 for an initial consultation.

The views expressed in this publication are solely those of the author; they are not reflective or indicative of licensee’s position, and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author.