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Life insurance explained

Life insurance explained

Are you the ‘better safe than sorry’ or a ‘she’ll be alright’ type when it comes to insurance?

Many people view insurance protection as a ‘waste of money’ or ‘an ongoing cost that you don’t get anything back from’?

Shockingly, many people are more likely to insure their car than they are their lives.

What would happen to your family if something were to happen to you?

Do you know how long you could survive financially if you had to stop work suddenly?

Life insurance cover not only provides you and your family with financial protection in the event of unexpected death, illness, injury or a major health catastrophe, it also provides peace of mind.

It aims to remove or reduce the financial stress that inevitably occurs as a result of these events.

With something as important as protecting your life, the details can easily appear overwhelming.

We want to make insurance as straight forward as possible, so we’ve broken down the main types of cover for you below.

Life insurance cover

What is it?

Life insurance cover leaves your loved ones with a lump sum to help their financial wellbeing if you were to pass away.

What is the benefit?

Knowing people who depend on you will not be financially disadvantaged with the burden of maintaining living standards or making loan repayments will provide you with peace of mind.

What do I need to know?

As a general rule, you should aim to have enough cover to pay all large debts and provide your family or other dependants with a lump sum that can be invested to earn an income to replace your lost earnings.

Total and permanent disablement cover

What is it?

Total and permanent disablement (TPD) cover pays a lump sum should you become totally and permanently disabled through illness or injury and are unable to ever work again in a job given your education, training or experience.

Why get it?

Becoming totally or permanently disabled can be a financial burden. It can prevent you from earning an income at a time when you have additional expenses to cover such as medical and/or rehabilitation costs. Your family also suffers from your disablement both financially and emotionally. TPD benefits help ease the financial concerns experienced at this difficult time.

Case study:

Angela is 35 and has a fixed TPD cover worth $400,000. After a car accident she is deemed to be totally and permanently disabled. Angela is therefore eligible to receive a TPD benefit of $400,000.

Trauma (crisis) insurance cover

What is is?

Trauma or crisis cover provides a lump sum payment to help people recover from a traumatic event such as a heart attack, cancer or stroke.

Why get it?

This lump sum can be used to ease financial stress during a period of recuperation, where items such as home modifications and specialist medical attention may be incurred.

What do I need to know?

Trauma cover and total disability insurance (TPD) are similar but are designed to produce two different outcomes. Trauma insurance is for specific illnesses and covers you if a diagnosis of that illness is made. Ideally, you are able to get back to your normal life with no severe financial consequences, after a full recovery is made.

Income protection

What is it?

If you rely on a regular income we recommend that you consider income protection. Your ability to earn an income is possibly your most valuable asset and should be protected.

Why get it?

Income protection can provide you with a safety net if you are unable to work in the event of a temporary disablement due to sickness or accident. It is designed to help maintain your lifestyle by ensuring your cash flow needs and expenses can continue to be met during a period of absence from work.

What do I need to know?

The premiums that you will pay for this type of policy are generally tax deductible. If you hold your insurance within super, the super fund is able to claim a tax deduction on income protection insurance premiums which can reduce the cost of the cover.

Do you need life, TPD or trauma insurance cover?

If you answer YES to any of the questions below, then you may need to consider life, TPD or trauma insurance cover:

  • Do you have debts? Such as mortgage, credit cards, personal loans?
  • Do you have dependants? You need to think about their ongoing needs such as education expenses.
  • Do you have children from a previous marriage? Blended families tend to create more insurance needs.
  • Are you in a relationship and are you both in paid work? If your household needs two incomes to maintain your mortgage repayments and existing lifestyle, then you should both have adequate insurance cover.
  • Do you have dependent parents? Something we often overlook is our responsibility to help care for our ageing parents.
  • Do you have loose ends which need tying up such as money owed to family or friends?

Do you need Income protection?

  • Most of us insure our cars and houses, but we often don’t insure our most valuable asset – our income!
  • A consistent income stream is the lifeblood of families and business. You can insure your income for a very small percentage of your annual income.
  • If you answer NO to any of the questions below, then you may need to consider income protection:
    • Are you wealthy enough to be able to survive without your income?
    • Could you maintain your current lifestyle on social security (Centrelink) benefits?
    • Will your accumulated sick leave cover you for a long-term illness? If you are self-employed, you don’t have any sick leave!
    • Could you maintain your superannuation contributions if you didn’t have an income?
Case study

John and Sally are 38 and 36 respectively. They have two children: Matthew aged eight and Sheree aged six. John is employed full-time as an architect and earns $100,000 pa, whilst Sally works part-time at a local nursery and earns $20,000 pa. They have a mortgage of $220,000 and a car loan of $20,000. Their only assets, apart from the house and car, are John’s super of $30,000 and $3,000 in a savings account.

Policies for John and Sally to consider include:

  • An adequate level of life insurance cover for both John and Sally to ensure their debts will be paid upon either of their deaths (at least $240,000).
  • Additional life insurance cover for John (possibly an additional $1,000,000 of cover) because he is the main income earner, so Sally would have sufficient funds for living costs, children’s education and household maintenance.
  • Trauma insurance cover for both John and Sally to provide a lump sum to pay debts, house modifications and medical treatments should they suffer from a trauma event.
  • TPD cover for both John and Sally to provide the funds required for repayment of debts, medical expenses and to fund retirement needs should they not be able to return to the workforce.
  • John should obtain Income protection to cover 75 per cent of his income to ensure that they will be able to meet their day-to-day expenses. Because Sally works part-time she may not be eligible for income protection.

If you have any questions concerning the information covered in this article or concerning your situation, please feel free to contact Michael Forster, Accountplan’s Financial Planner, who will be happy to assist you.

Article sourced from Executive Wealth Management

AccountPlan Financial Planner Michael Forster is an authorised representative of Executive Wealth Management Financial Services Pty Ltd (AFSL 245451)


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