4 ways to protect yourself from unexpected financial disaster
What is your most important asset? It is your car? Jewellery? Kim Kardashian may say it’s her physical appearance.
If you really think about it, your ability to go to work to earn an income is your most important asset.
Without your income, the lifestyle — you’ve become accustomed to —can easily fade away. At times like these some people heave a sigh of relief that they have insurance while others kick themselves for not having it. Not having insurance is a risk that many people still take and who can blame them? There are so many insurances out there that personal insurances are often overlooked or put off until a more prosperous time.
However, not everyone needs personal insurances. You may have built wealth or established a business where your passive income exceeds your medical and lifestyle expenses. You may have parents who are happy to support you financially until the day you die or perhaps, you’re happy to use your credit card to pay the bills.
But if you’re like me, maybe it’s the peace of mind that motivates you to take out personal insurance. ‘Sh!t happens’ in life; we all know that and for the most part we can pull ourselves up by the bootstraps and move on. But, when life-changing events such as premature death, or a serious accident or illness happens, it’s a different story altogether. At the very least, having personal insurance could save you a world of financial pain and heartache. You will have a lump sum or replacement of income to ensure your lifestyle, and that of your family is protected. You will also be able to maintain some sort of financial independence.
Some people think they will never use personal insurances, so they don’t bother with it, yet they insure their car and their house and contents. Physical assets seem to be of much higher priority in Australia than personal assets (that’s you) when both are equally as important. Sure, if you don’t make a claim your premiums may have been wasted, but if you do make a claim the premiums will be worth every penny.
Then there are other factors that are often not taken into account. Did you know that most people retire involuntarily, either through ill health, redundancy or having to leave work to look after family? This is where personal insurances can help close the retirement gap if you are ever forced to medically retire.
Income protection and trauma insurance have the highest percentage of claims. Mental health, cancer, heart issues and severe back pain are generally the most common reasons for claims.
Which personal insurance policies are right for you?
There are 4 types of personal insurances. They include:
1. Income protection
Generally replaces up to 75% of your income while you are temporarily or permanently disabled. There is a waiting period and a benefit payment period. Sometimes superannuation contributions are payable too.
2. Trauma insurance
Pays a tax-free lump sum into your bank account to spend on whatever you like in the event of a trauma event such as cancer and heart issues. Kids can have trauma insurance too.
3. Total and Permanent Disability (TPD)
Pays a lump sum in the event of never being able to work again in any occupation that you are trained, qualified or experienced in. Usually 2 specialists are needed to sign off that you satisfy this definition.
4. Life insurance
Pays a lump sum in the event of your premature death to specified beneficiaries or your estate.
Ways to pay for personal insurance
Superannuation or outside superannuation can be used to pay life, TPD and income protection insurance. There are differing prices, features and taxes applied to holding the policies inside or outside superannuation.
If you have the policy in your own name or through your business, income protection is usually tax deductible.
What to look out for when considering personal insurance
Although cost is a factor, it shouldn’t be the primary focus. Not all insurances are created equal so it’s important to compare the features too. For example, there are differing TPD definitions, including a recent change to the AustralianSuper definition which has made it harder to make a claim. Some polices also have a 6 month waiting period instead of a 3 month waiting period, for TPD claims. Therefore, it’s important to read the fine print.
Some income protection policies will pay you a guaranteed monthly benefit, whereas some will require you to prove your income for the 12 months prior to claim. Therefore I encourage you to review your policy before you plan to reduce your working hours.
For some clients I have recommended that they retain more than one super fund for insurance purposes, as opposed to consolidating to one fund.
What is underwriting?
To protect their pool of existing customers, insurance providers screen which members they invite in to their insurance pool. They do this via an underwriting process which is basically a medical questionnaire designed to screen out pre-existing medical conditions. The risk of inviting high risk members is that it can increase the cost of premiums for everyone in that pool.
You may have seen some advertisements on TV about insurance being provided without upfront medicals. Be wary. You will need to go through the medicals at the time of the claim, because they still don’t insure you for pre-existing medical conditions.
How much does personal insurance cost?
It varies greatly based on age, occupation and income. I recently discovered that Pilots are hard to insure, and unfortunately public servants are becoming more expensive to insure too, due to an increase in claims.
There are fee structures that you can elect to help prevent large insurance premium rises over time.
Some providers provide a discount to your premium if you have a good BMI. Others provide gym, flight and day spa discounts if you exercise regularly and frequent flyer points.
Why pay for an expert to review your insurance?
Sure, you can do it yourself but an expert (that’s me!) knows all the features, benefits and requirements of your insurance policies so you will actually know what you are getting. Not only will you get it done right first time, an expert can save you time and money over the long term. You can be assured that if I’ve helped you apply for the policy, I will also be by your side to help you make a claim.
Cover yourself with confidence by letting me review your personal finances. My risk only advice service may cost a lot less than the expense you could incur from unexpected medical or income loss. If you wish to discuss this with me further, please feel free to book your complementary appointment at a date and time that’s convenient to you.
Gianna Thomson and Thomson Wealth Pty Ltd ACN 626 920 161 trading as Gianna Thomson are authorised representatives of Fitzpatricks Private Wealth Pty Ltd, ABN 33 093 667 595, AFSL 247 429. This is general information only and does not consider your personal circumstances, needs and objectives. It is important you seek advice from a professional financial adviser prior to making any decisions.