The most common reason given for not taking out insurance is “I can’t afford it.” The question that must be asked is “Can you afford not to have insurance?” Your financial adviser can review your circumstances and will make recommendations that will meet your insurance objectives.
If the cost of the insurance is a consideration you should discuss this with your financial adviser as there are ways to reduce the premium while still taking out insurance cover. Some of the options available are:
The most common way to reduce the insurance premium is to reduce the amount of cover. You need to be aware that in these cases you are accepting additional risk and are deciding to self-insure for the difference. Your financial adviser can recommend a set level of cover based on your specific financial objectives and circumstances. If you do decide to take out a lower level of cover, then you should be aware that not all your objectives may be able to be met.
Stepped versus level premiums
Stepped premiums increase each year, whereas level premiums remain constant over either a fixed period or the life of the policy.
Stepped premiums have a lower initial cost. Your premium will be re-calculated on each renewal date of your policy based on your age at that time. Premiums may also change according to other factors. Stepped premiums allow you to pay only for the cost of the actual risk inherent in the insurance depending on your age at the time of the premium payment. This means that the cost of your insurance will generally increase from year to year in line with your age.
This structure also allows you to potentially reduce your costs where you actively monitor your cover to ensure that the amount and type of cover moves in line with your needs. For example, if you have paid off your mortgage, or your children have left home, you could consider reducing the amount of your cover. Stepped premiums are a means to help you pay the actual costs for what you need at any time.
Level premiums are a means of smoothing the increasing costs of insurance premiums. Whilst paying higher premiums early in the policy in comparison to stepped premiums, they will not increase substantially over time. This smoothing may have benefits if you intend to retain your cover at fairly steady levels for a long period of time. It allows the premiums to be affordable for the long-term.
Holding your Life and TPD insurance through super is often a cost-effective and easy option. A further advantage of holding insurance through super is that you may be able to use pre-tax money to fund the premiums. For example, if you are employed, you can either make a tax-deductible contribution into super or use salary sacrifice to pay for the annual premium, and if you are self-employed, you should be able to claim a tax deduction for the contribution you made into your super to fund the premium. This may allow you to either take out additional insurance at the same cost or take out the same level of cover at a reduced cost.
However, you need to be aware that there may be tax implications on the insurance proceeds if your beneficiary is not a dependent. For example, if the proceeds are paid to a financially independent child who is over age 18, tax would be payable. If you do not make a binding beneficiary nomination, or your super does not offer binding nomination, the super trustee has the discretion to decide who gets your benefits when you die.
In addition, the cost of insurance premiums is deducted from your super balance, which will reduce the money available for your retirement.
Any new insurance policies you hold through super are only offered with limited conditions that allow you to access your benefit in the event of claim.
Increase the waiting period
The longer the waiting period for your income protection insurance benefit payment, the lower the premium. You need to be aware that most policies pay in arrears – this means if you have a policy with a 30-day waiting period, you will not receive an income payment until day 60.
If you increase your waiting period from 30 days to 90 days, which will decrease the premium payable, you will have to fund living expenses for an additional 60 days. If you have a large balance of sick or annual leave this can be used to fund your living needs during the waiting period, but if you don’t have a large amount of leave or a cash reserve you should think carefully before increasing your waiting period.
Reduce the benefit period
The benefit period is the period of time that your income protection policy will pay you an income. The shorter the benefit period, the lower the premium. You can have a benefit period as short as 2 years, or benefits payable until you reach age 65. However, you need to consider the impact if you were unable to ever work again.
If you have investments outside of super that you can use to fund your living needs, then you could consider reducing your benefit period. In some cases, you may be able to access your super early, but you need to then consider what will fund your living expenses long-term and through retirement.