2 November 2016 by Aon Hewitt
Most of us don’t question the need to insure our physical assets such as houses and cars. However, when it comes to our lives and ability to earn an income, many Australians tend to overlook – or have inadequate cover for – this important element of an otherwise sound financial plan.
Personal insurance can provide peace of mind and reassurance that if the unexpected happens, you and your loved ones will be protected. At its core, insurance is all about transferring risk. If you believe that you and your family could withstand the financial risk that might accompany adverse health or premature death of an income earner, then perhaps you don’t need personal insurance. However, if you’re like the vast bulk of Australians for whom such an event would prove financially crippling, adequate protection is a necessity.
A robust financial plan will consider a range of personal insurance scenarios such as life insurance, income protection, disability and trauma, providing a safety net and level of security for you and your family in the event of an unfortunate scenario.
Life insurance: Is your level of cover adequate?
In 2014 the MySuper regulations legislated that mandatory life insurance be included in employer-supported superannuation funds. Not everyone has access to employer super which means there are still individuals and families that are not protected at all.
Even those that are members of an eligible super fund are likely to be seriously under-insured for their needs. Insurance levels within super vary from fund-to-fund and may be much lower than required by individual families.
Further, research by actuarial firm Rice Warner in 2014 suggested that even where insurance is held, it’s likely to be inadequate. This particular study found that for the ‘typical’ middle income Australian family with two children, an adequate level of life insurance would be $680,000, whereas the median level held was only $258,000. That’s a big gap and the shortfall could cause significant financial strain to a family confronted with adverse circumstances.
Of course there’s really no such thing as ‘typical’ and the amount that’s right for you depends on many factors, including household debt levels, the amount of income that would need to be replaced, ages of any dependants and a host of other issues. There’s potentially quite a lot at stake so it’s important to take the time to think through all the variables.
Another form of insurance to consider is income protection (which is also known as salary continuance). Again, research supports the need for this type of cover. According to a study conducted by insurer Zurich Australia in 2014, 38% of Australians believe they could only survive less than a month without their normal income before needing to sell off assets.
Income protection cover will provide up to 75% of your salary in the event you’re unable to work as a result of injury or illness. The premium payable can be impacted by a variety of factors, including your age and income level, and some variables which you can specify such as how long you want to wait before benefits begin to be paid and a benefit payment period. It’s worth noting that premiums for income protection are generally tax deductible.
Total and permanent disability (TPD)
Also worthy of consideration in a well-constructed portfolio of insurances is cover for total and permanent disability (TPD) which pays a lump sum benefit if, as the name suggests, you become disabled and as a result are unable to ever work again. TPD has the same financial impact as death, as it spells an inability to ever generate income again. In fact, the impact can be greater because of the need for ongoing care and lifestyle modifications.
Last and by no means least is trauma (or critical illness) insurance, under which a pre-determined lump sum is payable if you’re diagnosed with a condition specified in the policy such as cancer or heart disease. It’s a useful form of cover to have in place to help meet medical bills and can help to provide a level of financial comfort for those who are unfortunately afflicted with such conditions.
Start a conversation with us
With so many variables and options available, personal insurance can be a confusing and emotionally-charged area to consider. If you would like support with incorporating a personal insurance strategy into your financial plan, please contact us.