In order to properly assist you in achieving your goals and objectives, a financial strategy must not only help assist in building wealth, it must also protect what you currently have. The most effective method of protecting your assets is through risk management strategies such as insurance.
Australia is one of the most uninsured countries in the world. It is essentially the transfer of risk from you to another entity (insurance company). This means, that the insurer agrees to compensate you under certain circumstances if you suffer a loss. Without insurance, you would have to pay for the financial loss yourself.
Implementing risk management strategies such as personal insurances may assist to reduce the financial stress experienced when you find yourself or your family sick or injured.
There are various types of personal insurances available in the market however they can be broadly categorised into the following:
Term Life Insurance
In the event of your death or terminal illness, term life insurance offers a lump sum payment which is used to provide peace of mind and financial security for your family.
Consider the impact on your family if you or your partner were to pass. This impact may be just as substantial for those partners that are not working or low income earners as it is possible that they may be looking after children or other dependants.
If these partners are unable to continue caring for dependants, what elements of life would need to change?
Total and Permanent Disability Insurance (TPD)
This type of cover provides for the payment of a lump sum benefit in the event that the insured individual becomes totally and permanently disabled as a result of illness or injury and is unable to work again. The definition of total and permanently disabled varies among insurers and should be carefully considered when choosing an insurer.
Payment of a lump sum TPD is usually made in circumstances where the insured:
- Is unable to work again;
- Has lost a limb(s) or sight; and/or
- Is unable to perform basic daily living activities
Income Protection Insurance
Income protection insurance provides cover for income lost due to the inability to work as a result of sickness or injury. It pays the life insured a regular income stream monthly depending on the policy provisions, rather than as a lump sum. The amount payable varies upon individual and occupation, however as a general rule, up to 75.00% of pre-disability income may be covered.
Polices also have both a waiting period (how long you need to wait before being paid) and a benefit period (how long you will be paid for).
Waiting periods can range from 14 days to 2 years. The waiting period will directly impact that premium payable, and this should be taken into consideration when selecting an appropriate policy.
Benefit periods also vary and may be 2 years, 5 years or even up to age 70. It is important to note that the benefit period sets the maximum period for benefits to be paid. If you are on claim and you recover and go back to work, your payments may reduce or cease.
Income Protection is the most common type of insurance cover that is claimed upon and particularly important when there are ongoing commitments to be met irrespective of an individual generating and income. Examples may include; children school fees, mortgage or debt repayments, or rent.
Critical Illness (Trauma) Insurance
Trauma or critical illness insurance is designed to pay a lump sum on the diagnosis of a specifically insured medical event defined in the policy.
Many policies in today’s market cover more than forty different major medical conditions including various forms of cancer, stroke and even major car accidents.
The purpose of this type of cover is to assist in the payment of medical costs associated with the recovery from such an illness or injury. It may also include an allowance for the necessary adjustments to be made to the home in the event of an associated disablement from the illness.
It is important to understand the specific events/conditions that are and that are not covered under your policy.
None of us want to have our children suffer any major illness or injury. Should we be unfortunate enough to have this happen to us however, the costs can be substantial.
Insurance companies now provide cover to not only protect yourself and your partners, but also to protect your children.
The cover provided may assist the family financially so that everyone can focus on having the child recover without worry of the financial cost.
Structuring Your Insurance
Not only is it important to know what type of insurance you need, it is also important to know effective ways of structuring insurances.
Depending on your position, various entities may be used in order to pay for your insurances and potentially reduce the impact an insurance premium has upon your cash flow.
For example, Term Life, TPD and Income Protection insurance may be paid for through the use of your existing superannuation funds.
If your superannuation fund is able to pay the insurance cost for you, your personal cash flow position may not be affected and yet, you are still protected in the event of loss.
Income Protection held personally may also allow you to reduce your tax as this type of cover is generally allowed to be used to offset the tax on your income.
So that you may protect yourself and those that you care about, make an appointment with one of the team and discuss your options when it comes to Life, Total and Permanent Disability (TPD), Income Protection and Trauma Insurance.
When building towards your future, protecting your current position is paramount.
General Advice Warning
The information provided in this article is general in nature and does not constitute personal financial advice. Before acting on any information, you should consider the appropriateness of the information provided having regard to your current position.