Insurance plays a critical role in our financial wellbeing, ensuring that when the unthinkable takes place, you and your family can focus on what’s important. The purpose of insurance, broadly speaking, is to keep your and your family in the position you were in prior to a health incident taking place.
The first consideration with insurance is to determine the level of cover you will need. This is known as an insurance needs analysis. The best way to approach this is to think about the situation you might find yourself in if you were unable to work for a period of time, ever again or if you were to pass away and then determine what’s important to you. For example, if you became disabled and can no longer work you may want to pay the mortgage off, make some renovations to your home based on your disability and have some money to supplement a disability support pension.
There are four main insurances that cover different events:
This insurance is paid out upon the death of the insured person. Typically, you want to cover any debts you might have, funeral costs, ongoing education if you have children and perhaps an amount for your partner to take time off work for grieving. If you are the primary income earner or even if it is 50/50, you should think about what it would mean to those you leave behind to lose that income.
This insurance is paid out when the insured person receives a disability that would render them unable to perform their work duties. Importantly, there are two definitions of ‘unable to perform work duties’. The first is any occupation meaning that to access your insurance you must be considered unable to work in any occupation. If you are still able to work in a different field that is reasonably suited given your age, education, experience and other factors, then you will not receive the payment. Own occupation means that if you become disabled and can longer perform the job you were doing then you will receive the payment irrespective of whether you could perform another job. It is important to think about living with a disability and based on a number of health factors, figure out how much you think you would need.
Income protection usually covers around 75% of your income when you are injured or unwell and unable to go back to work for a set period of time. When selecting a product, you are required to consider things such as:
Waiting period – how many days/weeks between when you first were injured and when you will be eligible to make a claim. When deciding this you should consider things such as savings and annual leave;
Benefit period – once you do start receiving payments, how long do they last for? 2 years? 5 years? Until you are aged 65?; and
Agree value or indemnity? Agreed value is where you show evidence of your income at the time of writing the policy and agree on how much cover you will get whereas indemnity, your benefit is calculated based on what you are earning at the time. This can be an important consideration when you are self-employed.
Trauma cover is paid out when you are diagnosed with a serious illness that impacts your ability to work, amongst other things. Each policy has their own definitions of what a ‘critical illness’ is however common examples include stroke, cancers and heart attacks.
Trauma can help to pay for immediate medical expenses such as procedures that are not covered by your private health insurance, ongoing medical expenses, meeting your financial obligations and
other relevant costs. Another consideration is that if you stop working for a few weeks, your income protection might not kick in for 30 days or more and trauma can help fill that gap. Furthermore, if your partner needed to take time off, their income protection wouldn’t be accessible so it may help to fund that gap as well.
Insurance is a complicated area that requires specialist knowledge to get it right. It’s very important to balance multiple things such as the right amount of cover and how much you can afford. Finally, there are multiple considerations such as stepped vs. level premiums, how your superannuation balance and other savings might affect what level of cover you should get, whether you should have your insurance inside your superannuation fund or in your personal name, whether you already have insurance in your superannuation and a host of other points.
This information is general in nature and was provided by Fiduciary Financial Services Pty Ltd AFSL 247344.
General Advice Warning
This information may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice provided as part of this information, having regard to your own objectives, financial situation and needs.
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