Personal Insurance Guide
Managing Your Financial Risks
Introduction
The older we get it seems inevitable that we have more responsibilities: mortgages, car repayments and maintenance, children, school fees and never-ending bills. The people in our lives depend on us and our income for survival. If you are the sole or main income earner, it can be a crippling thought to imagine what would happen to your family if you died, could not work, or suffered a serious illness or injury. Unfortunately, the bills keep coming and in fact can increase when you have had a life changing incident like a stroke or car accident. That is why personal insurance is so important for the stability and security of your family. Insurance is the back-up plan for when life hasn’t gone to plan, and it can help to secure your family’s financial wellbeing.
Personal risk insurance can provide you with peace of mind. It shifts the financial burden from you and your family to the insurers when certain life changing things happen, such as a terminal illness/death, trauma, or total and permanent disability. For example, serious stroke followed by months of rehab, cancer requiring chemo and radiation therapy.
Do I Need Cover?
For people with family responsibilities and or a mortgages, the short answer is yes. It is very unlikely that you would not require any cover. If you have a mortgage or any debt, are relied upon for paying bills, and or have dependents, you need personal insurance. The better question is what type(s) and how much cover do I need?
What Is Personal Insurance?
The concept of insurance is simple. When you have something to lose, and you cannot afford to pay for a loss yourself, you pay for insurance. By paying money every month or year, you receive the peace of mind that if something goes wrong, the insurance company will pay for the things you need to make life like it was before your loss. It works on the principle that the majority pay for the minority who claim. Meaning that lots of people take out insurance in case something ever happens so that they and their family can still survive, but fortunately in reality only the minority claim.
What Types of Cover Do I Need?
The decision to take out personal insurance is about limiting risk. When reviewing the different types of cover, it is important to consider your personal circumstances and your risk profile. The type of cover you require will depend on your level of debt, your family situation, and your profession. It is important to talk through your options with an experienced financial planner as they can guide you to make decisions appropriate for you and your family.
In general, there are four main types of cover:
- Life (also known as death cover) – pays a lump sum on your death or the diagnosis of a terminal illness. It provides financial security for your dependents and can be used to pay out your mortgage, provide an investment sum or income stream for your family or fund the sale of a business. The premium (cost) depends on the level of cover (sum insured) you take out. It can be paid personally or through superannuation. The benefit can be paid to your nominated beneficiaries, it can go to your spouse, child, family member, organization, trust, or a combination of the above.
- Total Permanent Disability (TPD) – Pays a lump sum if you become totally and permanently disabled and are unlikely to ever work again in a job which you are reasonably qualified for by education, training, or experience. It can be used to pay out debts, medical expenses or provide for your dependent(s). Likewise, it can be used to fund the sale of a business if the owner should become disabled. This type of cover can also be paid personally and from your superannuation account.
- Income Protection (also known as salary continuance) – replaces your income if you cannot work due to sickness or accident. Income protection insures up to 70% of your income up to the age of 65. For tax purposes, any payments you receive from a policy are classed as assessable income. You are usually able to claim a tax deduction on the premiums you pay. When taking out this type of insurance it is important to note that there are usually waiting periods for receiving benefits. These can range from two weeks to two years and depend on what you select when taking out the policy. The longer the waiting period generally the cheaper the policy.
- Trauma (also known as critical illness) – provides a lump sum if you suffer a traumatic event such as a heart attack, stroke or cancer, the benefit is paid when the diagnosis is confirmed. The lump sum can be used to help fund medical expenses, reduce or pay off your mortgage, or just allow you time to focus on your family and recovery during a difficult time.
What factors will affect my Premiums?
A premium is the amount you pay for your insurance. The premium varies for each policy holder and is calculated taking into consideration several factors:
- Age
- Gender
- Smoker status
- Your health (including pre-existing conditions)
- The life insurance company you select (each have different premiums and risk ratings)
- The amount of cover (sums insured) you select.
- The waiting period and benefit period you select
- Your occupation and its associated hazards
- Add-ons (you may wish to select additional policy options at a cost)
Before you can take out personal insurance you will undergo an insurance pre-assessment.
What is a life insurance assessment?
When you apply for cover, the life insurance company will first assess your current health status (including medical history) and your occupation, once they have this information it allows them to assess your application and (ideally) offer you insurance.
This process involves a questionnaire regarding your general health e.g., height, weight, age and pre-existing conditions and other questions regarding your current lifestyle, such as risky sports and smoking status. It will also ask questions regarding medical conditions that may exist in your family. The more detailed information you provide, the more comprehensive the pre-assessment will be.
Once the application has been assessed the possible outcomes are as follows:
Revised terms may include:
- Loadings: An additional premium called a loading might be added onto your premium if you have a pre-existing health condition like thyroid issues or if you’re a smoker. They may offer you the usual policy benefits but increase the premium.
- Exclusions: Certain medical conditions and pastime may be excluded from your policy for events that relate to your pre-existing medical condition (e.g. a right knee exclusion), risky hobbies (e.g. dirt bike riding), and or occupational hazards (e.g. mining explosives).
Example
Loading | A 50% loading applies to your policy due to a high BMI (body mass index) |
Exclusion | Right knee exclusion due to a previous football injury |
*It’s important to get insurance when you are young and healthy to avoid the chance of such things occurring in the future.
When revised terms are offered it doesn’t mean they are forever. In some cases, the insurer needs to see more time pass, or a lifestyle or occupational change and can reassess the risk at a future point in time. Your adviser will work with you and the insurer to get an ideal outcome in the present and to also assist in reviewing your covers in the future when circumstances change.
If standard terms cannot be offered, then the outcome of a pre-assessment is not guaranteed but provides you with a general idea of what kind of cover and premiums you may qualify for. If you cannot be covered by a standard policy with one insurer, your adviser will look around for an insurer that will cover you or an insurance provider that might offer a policy with revised terms (usually for pre-existing conditions).
How Much Cover Do I Need?
The answer to this question is “it depends”. It depends on your personal and financial situation. When deciding on what types of insurances and what level of cover it is important to consider what ongoing financial obligations you have:
- Debt (credit cards, cars, mortgages, personal loans)
- Living expenses (day-to-day bills: food, household bills, social life)
- Future expenses (children’s education)
- Any future benefit/ inheritance you would like to leave for your children
What will be the premiums?
There are different types of covers and most importantly different levels of cover. The quality of a policy is extremely important when selecting insurance. Cheapest is not necessarily the most appropriate for you. Premiums are determined by a combination of the sum insured, benefit period, waiting periods and your risk profile. The cost of your premium can be adjusted by tweaking each of these depending on your insurance requirements and is a vital discussion to have with your financial adviser.
How do we calculate the amount of cover you need?
When calculating each client’s cover there are several variables that must be considered depending on their unique circumstances:
- Debts such as mortgages, future debts and/or obligations (such as buying a business or upgrading home)
- The number of children you have or people that are dependent on you and their ongoing requirements for education and care
- If you have a child with special needs
- The impact of loss of income or one or both partners (where applicable)
- Number of years to retirement
- Cost of ad hoc expenses such as funeral or disability equipment
- Cost of making changes to home to support possible disabilities
- Loss of superannuation
A cost is applied to each applicable variable and the sum helps determine the level of cover you need. The level of cover then may be rounded up as there can be benefits and relative cost savings. For example, the total may come to $920,000 but there can be benefits to taking out $1 million worth of cover. Much like buying a meal deal at a fast-food chain. It is cheaper to buy the burger, drink, and chips in a meal deal than it is buying all three separately.
It is important to find a balance between the amount of premium you pay and affordability. For some people they may need $2 million worth of cover but decide to only take our $1 million cover because that is all they can afford, or alternatively, they may extend waiting periods or benefit periods as a way of improving affordability. It is important to seek expert advice to obtain the most appropriate solution for you and your family.
Waiting Periods
When taking out income insurance there are different waiting period options. A waiting period is the amount of time that you are required to wait till the insurance company will start paying out your claim. This can vary from 14 days to 2 years. What this effectively means is the amount of time you would have to self-fund your lifestyle before the insurance company would start paying.
Benefit Period
The benefit period is how long you choose to be cover for also impacts your premium. Depending on your circumstances you may want to be covered anywhere from 2 years or till age 65.
Example
Scenario 1 | Scenario 2 | Scenario 3 | |
Waiting Period | 30 days | 30 days | 90 days |
Benefit Period | 5 years | Age 65 | Age 65 |
How should I pay for personal insurance?
There are different tax implications on the policies you take out under different ownership structures. The main two methods are personally, or through your superannuation fund (Note: other options are available for more complex arrangements.) The appropriate payment source depends on your personal circumstances, who you beneficiaries are, and if you have any estate planning considerations (for example blended families). It is therefore important to discuss the options with your financial adviser and make considered decisions for your circumstances.
Ownership & Payment of Policies
COVER TYPE | PERSONAL | SUPERANNUATION |
Life | Yes | Yes |
TPD | Yes | Yes |
Income Protection | Yes | Yes |
Trauma | Yes | No |
When is the Best Time to Take Out Personal Insurance?
It is common for people to take out personal insurance around major life events such as buying a house, getting married or starting a family. However, the earlier the better. Your health status can change at any time, but generally the younger you are the healthier you are, and your health status affects your premiums/costs.
What are the options for paying for personal insurance?
Stepped versus level premiums
When you take out personal insurance you will likely be given the choice of stepped or level premiums. Your adviser will talk you through which option suits your needs.
Summary
Stepped | Premiums go up with your age, cheaper while young and increase each year |
Level | Premiums do not increase with your age |
Note: premiums can still be affected by other factors. Insurance companies are legally obligated to ensure that they remain economically viable.
Stepped V Level Premiums Over Time
STRUCTURE | PROS | CONS |
Stepped | · Cheaper when you initially take out a policy. · Suits people who don’t want life insurance for the long term. | · Usually costs more long-term. · Increasing premiums means it can become unaffordable as you get older. |
Level | · Generally cheaper long-term. · Good if you want longer-term security. · Consistent fee means it is easier to budget for. | · More expensive initially · Premiums can still increase slightly due to inflation rate and increase in policy fees. |
Below is a hypothetical example of stepped v level annual premium over 10 years for trauma insurance of a 35 year old at inception. The stepped premiums start out cheaper, but in the long run cost you more.
Personal Insurance Timeline
- Meet with your insurance adviser
- Insurance pre-assessment of health and pastimes
- Conduct needs analysis to determine how much cover is needed
- Research and product comparisons
- Finalise recommendations and prepare Statement of Advice (SOA)
- Presentation of Advice
- Complete insurance applications and submit to the insurer
- Insurer assessment. Sometimes further information will be requested from your doctors.
- Approval
- Annual reviews to check suitability of cover with changing life circumstances