Types of personal insurances available to us:
Life insurance - pays a lump sum to beneficiaries in the event of death or terminal illness. Not tax deductible to individual but is tax deductible to superannuation funds
TPD - Total and Permanent Disability- pays a lump sum in the event of disability and is not tax deductible to individual but is tax deductible to super fund
Income Protection - pays you 75% of your normal income in the event of a claim and is tax deductible to the individual and to super for 2 years cover only
Trauma - pays a lump sum on the diagnosis of a specific illness like heart attack, stroke or some cancers. Not tax deductible to either individual or super fund
Why would we want personal insurance?
There are two types of people who don’t get personal insurance;
1. The self-insured- those people who have enough passive income from investments to meet their expenses
2. Those who are underinsured, apathetic or simply can’t afford it
How much insurance do I need?
There are a number of steps in calculating the level of personal insurance that you need.
e.g. Life Insurance for a family with one child in school, a mortgage and some credit card debt. You have to imagine what expenses you would like to cover, should the main breadwinner die:
Mortgage: $300,000
Credit card debts: $5,000
School fees $5,000 pa for 7 years: $35,000
$20,000 pa for household expenses: $400,000
TOTAL $740,000
The costs that they’d like to cover are: a mortgage of around $300,000, credit card debts of $5,000, school fees of $5,000 per annum for 7 years and household expenses of $20,000 per annum. For this situation, you may need insurance of around $740,000. This pays out the home loan, credit card and school fees and will provide a lump sum investment of $400,000 at 5% cash return to fund essential household expenses.
How do I get personal insurance?
Most financial advisers or brokers will sell insurance through a variety of companies but make sure you receive quotes from a number of different companies to keep the costs down.
Once you have decided on a company and policy, it’s really important to understand the PDS-that stands for product disclosure statement. As boring as it may seem, you need to read it and understand your inclusions and exclusions.
How much is insurance and what if I can’t afford it?
The cost of insurance varies according to a variety of factors such as age, sex, smoking status, weight, BMI etc. The company will put you over the pits, so to speak and undertake health tests to ensure you are not too high risk for them to insure you. They will also second your health records from your doctor before they finalise their premiums.
Women are cheaper to insure than men because they live longer, smokers are 50% more expensive to insure than non-smokers and you will most likely have exclusions for pre-existing medical conditions.
To keep the cost down, try an industry or retail super fund where they might have cheap group life, TPD and income protection insurance and perhaps without the invasive health tests. Many of the direct marketing companies that you see on TV also allow you to avoid the health tests but you REALLY need to understand how they charge and what their exclusions are in their PDSs.
Websites for comparisons or quotes
www.iselect.com.au
www.lifebroker.com.au
Website for educating yourself further about Insurance
www.knowrisk.com.au
About Sam
Sam Henderson is the CEO and Senior Financial Advisor at Henderson Maxwell - a boutique financial planning firm that specializes in actively managed accounts.
Sam has a Master of Commerce (in progress), a Bachelor of Commerce (Accounting), a Diploma and Advanced Diploma of Financial Services and an Advanced Diploma of Marketing Management and he is an Accredited Mortgage Consultant, direct-share specialist and an expert in self managed superannuation funds.
