As we wrap up step 3 in Becoming Financially Well Organised, we’ll be discussing the last few options to answer the question: If you were to pass away, would your family’s financial security be assured? We’ll go through Critical Illness Insurance, Income Protection Insurance, Health Insurance and finally wrap up with 6 tips for your Risk Management Plan
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.
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