If you were to pass away, would your family’s financial security be assured?
If you were disabled, in an accident or suffered from a long term illness, are you satisfied your income would be protected?
If you suffered from a critical illness, are you certain you have sufficient savings to see you through?
If you answered no to any of these questions, you need to minimise your risk.
There are two ways you can do this:
If your asset base can support you or your family if you pass away, or become injured or ill and cannot work, there may be a case to say that insurance isn’t necessary or at least not as essential.
If you are not in this position, your financial security is at risk and your risk plan should include insurance.
One of the keys to wealth accumulation is structure. Apart from the asset protection benefits of using the correct structure, you need to understand the impact taxation will have on your returns, which has a significant effect on the long term value of your assets.
The idea of personal insurance is to protect your family’s assets and income to ensure they have the ability to make the best choices. There are five main types of personal insurance that should be considered in any Risk Plan:
- Term Life
- Total and Permanent Disablement
- Critical Illness
- Income Protection
The below information discusses these types of *insurance products, how they fit within a Financially Well Organised strategy and address the issue of Risk Management.
*Prior to purchasing any insurance product, you should seek advice from an adviser authorised to provide advice under an Australian Financial Services Licence who will take into consideration your personal circumstances.
Term Life Insurance
A term life insurance policy will provide a lump sum payout if you pass away.
When determining how much insurance you need, you should consider:
- If I were to pass away, what are my financial and lifestyle wishes for my family?
- What amount of debt do I have and would the life insurance be used to clear that debt?
- What other costs do I want to cover: children’s education, annual family holiday, help with domestic duties, child care?
- Do I want my spouse to continue working or have the choice to work?
- What level of income does my family require to live comfortably?
Once you are clear on what you want to happen to ensure your family is financially secure, it’s a matter of working backwards to determine how much insurance you need. There is no simple formula as everyone’s situation is different.
The next question you need to ask yourself is, “Who should own the policy?”
There are generally two options for policy ownership:
- Within superannuation
- Outside superannuation
There are two main benefits of owning the policy within the superannuation environment:
- The premiums are tax deductible; and
- The proceeds from the policy (when they are paid out by the insurance company), will be paid tax free to the superannuation fund when paid to your spouse or financial dependants.
Total and Permanent Disablement (TPD)
This type of personal insurance covers you if can no longer work and depending on your policy terms, could either be any occupation or your own occupation.
The proceeds are paid out as a lump sum. A review of TPD policy definitions needs to be undertaken to ensure the policy payout definitions match your expectations and circumstances.
For example, if you can no longer work in your chosen career, but can still work in another job, the policy definition may not trigger the payout of the policy.
Therefore some of the issues that need to be considered include:
- What entity to own it in: super or personally?
- How much do I need?
There are some other traps to be careful of with TPD, when the policy is owned within a superannuation fund:
- Assuming that you are insured and can access your superannuation benefits, there may be additional tax payable on any withdrawal from the superannuation fund.
- A fund can only pay benefits to members when certain events occur. When a member is under their preservation age (the age when a person can access their super, which is between 55 and 60, depending on when they were born) the trigger event can be total and permanent disablement. The type of payment from the fund is called an “invalidity payment”. When a fund pays out an invalidity payment a formula is applied based on the age of the person compared to age 65. Depending on the gap, a significant amount of the policy proceeds may be taxable in the hands of the recipient at between 16.5% and 46.5%. Alternatively, if the
policy is owned outside of superannuation, the proceeds will be 100% tax free.
Critical Illness Insurance
This type of personal insurance provides you with a lump sum payout in the event of critical illness. Examples of critical illness include heart attack, stroke, cancer and other major traumas.
Your income should be covered by your income protection policy, but this will not cover everything. Sometimes there can be significant out of pocket medical expenses, depending on the condition you have suffered, or you may need to release some financial burden by paying out loans or needing additional care. Critical illness cover is designed to assist you in these times. However, there is no tax deductibility for critical illness insurance.
Income Protection Insurance
Income protection or accident and sickness insurance provides you with 75% of your income – paid to you on an ongoing basis and usually up to the age of 65 – if you are ill and cannot go back to work.
Some of the traps to be aware of when taking out your policy are:
- What is the amount of cover? It will be 75% of your income at that time. If your income grows, you may need to review and increase your policy cover so it supports your higher income.
- What are the waiting periods? Usually 30 or 90 days. The longer the waiting period, the cheaper the premium. However, the purpose of income protection insurance is to partially replace your income while you are ill. If you have a 90 day waiting period but only have enough savings or entitlements to cover 30 days, you may find yourself without any income for two months before the policy payout starts.
- Income protection insurance is tax deductible. When you take into consideration the tax savings, income protection insurance becomes even more affordable. You need to make sure that the correct owner is the owner of the policy for the payment to be tax deductible.
The last of the personal insurances is health insurance. This insurance is designed to cover our medical expenses when using private medical services. It covers hospital and extras such as physiotherapy, chiropractic, psychology, and so on. Health insurance is a personal choice. However, higher income earners pay additional tax if they do not have private health insurance.
Tips for your Risk Management Plan:
- There are two ways to minimise risk in the event of death, illness or injury – save or insure.
- Term Life insurance provides a payout on your death. It is often used to provide a capital sum to clear debts and leave enough capital for the survivors to generate an income.
- Total and Permanent Disablement (TPD) insurance provides a lump sum when something happens to you that will prevent you from working again. You need to consider whether the policy should be held in superannuation and ensure you are clear on the definitions within the policy that trigger a payout.
- Critical Illness insurance provides a lump sum when a significant illness or event occurs, where it is likely that you are able to go back to work, but not for a period of time.
- Income Protection insurance provides you with 75% of your income as a regular income replacement. Care must be taken to ensure that the correct amount of cover aligns to your personal income situation with the appropriate waiting periods.
- Prior to purchasing an insurance product you should seek advice from a licensed insurance advisor that takes into consideration your personal situation and circumstances. This must be reviewed in line with your overall Financially Well Organised strategy.
Call us on 07 3833 3999 if you have any questions about your family’s financial security.