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How to use insurance to protect the life you have created
Do I need insurance? Insurance is an important topic and my apologies for what I’m about to write, it may upset some but it’s important.
This concept will most likely be difficult to grasp if you are in the 18- to 30-year-old age bracket. I don’t mean intellectually difficult.
Imagine you now have a partner and 2 kids, a big mortgage and responsibilities. You are the sole money earner.
Unexpectedly you pass away.
Income stops.
Your partner has a house they can’t afford, 2 kids to raise and the desperate need for income.
Sounds bad doesn’t it.
Now I want you to imagine that YOU are the partner, not working, looking after the kids.
Your money-earning partner passes away.
YOU have to raise the kids, arrange an affordable place to live, find work, arrange child minders, survive.
Your world has been flipped upside down.
The stress.
The anxiety.
The fear.
Invincible
The reason I said most 18- to 30-year-olds won’t get it is that they tend to see themselves as invincible. Nothing bad will ever happen to me.
Plus, you generally don’t have too many responsibilities in this time.
If you have nothing to lose, you tend not to care about the consequences.
There is nothing wrong with that attitude. The first 10 years out of school are a great time. Exploring with world around you and within you. Expanding your horizons and having fun. They were awesome years for me.
The term “settling down” exists for a reason. With increasing age, you tend to settle down. You get the crazy fun out of your system and now it’s time to build a life. Your definition of fun changes. It happens in its own time for most people. However, some will never settle down. Each to their own.
The rise of responsibility
Generally, with time, responsibility grows.
You may buy a home with significant debt, find a partner, have kids (and/or pets). You need to fund all of this.
Your income is important.
I’d like to think that the life you are building is important to you. You care about the people in your life and the things that you do.
If something bad were to happen to you or your partner, wouldn’t you want to protect the lifestyle you have created?
The “what ifs” I hope never happen to you
- A trip to the hospital
- Premature death
- Permanently disabled
- Suffer a serious illness or injury
- Unable to earn an income
What if any of these happened to you?
How would your life or the lives of family members change?
I won’t provide any terrible stories of a loved one dying or being unable to perform basic functions of daily life without constant assistance or the life struggles of being a sole parent trying to raise kids and full-time work. Not to mention the hospital bills. I want to be honest without being horrifically dramatic.
But these outcomes of terrible luck of your own making can be minimised.
Insurance
You will most likely get to a point in life when not holding appropriate insurance is tantamount to gambling.
The gamble is that the “what if” scenarios mentioned above will not happen to you.
Statistical reports illustrate that the majority of adult Australians are significantly underinsured.
This means that your world or the world of your loved ones will significantly change, for the worse, if something bad were to happen to you.
The age group that is the most underinsured is the 45- to 64-year-olds.
This happens to coincide with the time in life of significant levels of debt (a home and car loans), kids to raise, feed and school, and saving for retirement. Meaning this age group has the most to lose.
The damage can be lessened with appropriate levels of insurance.
The 5 types of insurance that are essential
Terms do vary throughout the insurance industry, however, these are the five main types:
- Private Health
- Life
- Total and Permanent Disability
- Trauma
- Income Protection
Each of these type of insurance compliments each other to create a holistic lifestyle protection package.
Ultimately, the protection of the lifestyle you have created is what insurance is all about.
Private Health Insurance
There are two main types of private health insurance in Australia. Hospital policies, which help cover the cost of treatment and accommodation when in hospital and general treatment policies (also known as ancillary or extras) which cover ancillary treatment (e.g. dental, physiotherapy).
A government initiative called Lifetime Health Cover encourages people to take out private health insurance (hospital cover) early in life by offering lower premiums (the cost). People who delay taking out hospital cover will pay a 2% loading on top of their premium for every year they are aged over 30 when they first take out hospital cover.
If you take out cover at 40 instead of 30, you will pay 20% more than someone who joined at 30. Therefore, get it early.
Beware: The Medicare Levy Surcharge is a levy (aka tax) paid by Australian taxpayers who do not have private hospital cover and who earn above a certain income. The “levy” kicks in for singles earning more than $90,000 per year and families earning more than $180,000. Below that it is 0%.
The surcharge is calculated at the rate of 1% to 1.5% of your income.
For more details on private health insurance see the link below.
Click: https://www.privatehealth.gov.au/
Life Insurance
This is simple. You die, your nominated beneficiary receives a lump sum (a single amount) payment for the level you insured (e.g. $500,000).
Total and Permanent Disability (TPD) Insurance
TPD insurance pays a lump sum if you become totally and permanently disabled because of illness or injury and can never work again.
There are two types of TPD insurance:
- Any occupation – you are unable to work again in any occupation for which you have reasonable education, training or experience.
- Own occupation – you are unable to work again in your own occupation.
TPD (Any) insurance means that if you can’t work in your current role, it may be possible for you to work in another role that your education, training or experience allows for. Therefore, it is harder to satisfy this type of TPD and receive a payout.
Own occupation TPD is more expensive.
Trauma (aka Critical Illness) Insurance
Trauma insurance provides a lump sum payment if you suffer a serious illness such as a heart attack, stroke or cancer. The product disclosure statement will provide a list of things covered by your insurance policy.
Depending on how much cover you have, Trauma insurance covers the cost of medical treatment and potential rehabilitation following a covered medical event.
Income Protection (aka Salary Continuance within industry super funds)
If you are unable to work, a certain percentage of your income will be provided for a predetermined period of time. A common benefit period is “to age 65”. This means that from the time your insurance claim is approved by the insurer, they will pay you 70% (for example) of your income until you turn age 65.
Arguably, this is the most important of the four types of insurance.
How long can you survive without income?
Hopefully, if you have read my other articles, you are in the process of creating an emergency bank account with at least 3 to 6 months expenses.
This also highlights the importance of multiple income streams.
Note: Income Protection may be tax deductible to you if held in your name (as opposed to be owned within your super fund). However, the income received is taxable.
Each of the 4 insurance types cover different outcomes which is why it’s important to have them all.
How to access insurance
You can:
- Go direct to an insurer (research multiple insurers)
- See a financial adviser
- See an insurance specialist
Ideally, for Life, TPD, Trauma and Income Protection you want to see a financial adviser or insurance specialist.
Why?
- They will research a range of insurers to find what will provide a good level of protection. Different insurers have different terms and conditions that may or may not be beneficial to you.
- The cost varies between insurers. Sometimes significantly.
- They will/should do an analysis of how much insurance you need.
In my job, I do this sort of analysis. I consider the client’s budget, levels of debt, current and future expenses, costs of care, the type of job they do and the level of income they can cover.
To highlight why you should see a specialist, read a Product Disclosure Statement of an insurer. It will do your head in. It’s crazy.
Private Health Insurance is fine to do yourself.
How much insurance do you need?
There are many things to consider when doing the calculations for Life, TPD, Trauma and Income Protection.
- Debt
If you have a home loan, you want that paid out. If you have an investment property, you can either sell it off or pay off the debt.
- School fees.
Do your kids go to private school?
How many years left of school?
- Medical expenses
This includes immediate treatment and rehabilitation.
- What is the cost of care?
If you are permanently disabled and need constant care, how will you pay for that.
- Future income.
If you are 28 and can never work again, where will that income come from?
- Your retirement years.
How will you and your partner fund your retirement if you can’t earn income and receive super contributions?
This is why an expert is required.
If you are underinsured, it could be a disaster. If you are over insured, you end up paying too much.
Premiums
The cost of the insurance is called the premium.
Premiums are based on your age, gender, occupation and level of cover.
In your 20’s and 30’s the premiums are quite reasonable because statistically you are unlikely to suffer a serious health event. As you hit the 40’s and 50’s the premiums start to rise quickly in line with the risk of something bad happening.
There are many ways to manipulate the premium so it is affordable. This is why dealing with a specialist is important.
Your insurance portfolio
This what an insurance portfolio may look like.
- Private health insurance (hospital and extras)
- Life $1,000,000
- TPD (Any) $1,500,000
- Trauma $120,000
- Income protection $5,000 per month to age 65
Of course, the numbers will vary for everyone’s differing situations.
How to own insurance
This seems like an odd topic but there are multiple ways to own insurance (excluding private health insurance).
- In your name (you own the policy)
- In your super fund (they own the policy on your behalf)
Personally owning insurance is the simplest option, however, the premiums are paid from your personal cash flow.
It is possible to own Life, TPD and Income Protection insurance within your super account. Trauma must be owned personally.
By owning your insurance through your super account, your retirement savings pays for your insurance.
Personally, I don’t like that.
Why?
The premiums affect your compound interest. You WILL have significantly less at retirement when your super account funds the insurance premiums.
However ………..
Insurance in super is better than no insurance at all.
In my experience, it is a very common strategy because people aren’t prepared to set aside money now for the insurance premiums. They allow their future self to pay for it by diminishing their retirement savings.
The other considerations for holding insurance within super are:
- The rules surrounding super
- Tax
A situation may occur that you are successful in a claim with your insurer. They then pay the benefit into your super fund (because the super fund owns the policy) but you are not allowed to access your payment due to the rules surrounding super.
Depending on the circumstances, your payout may be taxed.
All the more reason for specialist assistance.
Self-insurance
If you have done well for yourself, you may have sufficient assets to cover all your insurance needs. This is called self-insurance.
Income protection could be replaced by multiple income streams (dividends, rentals, profits from a business).
Most people are not in this position though!
The Wrap
My aim throughout this article is to illustrate the importance of protecting you, your assets and your family’s lifestyle in the event of a health crisis. Private Health Insurance, Life, TPD, Trauma and Income Protection provide a holistic approach to protecting all you have built throughout your life.
I hope you never have to face such a crisis but if you do, having a level of security via insurance can mean the difference of getting through a terrible time a bit easier instead of it being a nightmare.
I am aware I have pushed expert advice here, however, to insure yourself optimally is not easy. Reading an insurer’s product disclosure statement is yuck and very complicated. I hate it.
I hate dealing with insurance, but I know it is so important.
For many of you reading this, insurance is not an issue for you now. But in time, it will be.
If things turn bad, will you be protected?
Take action in your life.
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