When we are single we often do not consider the consequences of getting sick and being unable to work for an extended period (or even worse, the implications of dying.). Also being young tends to make us feel invincible, that nothing bad will happen to us and as such insurances are a waste of money.
Later in life we find a significant partner we want to spend the rest of our life together with, have children and of course buy our first property to live in. Now the implications of getting sick or dying becomes real and tends to leave our loved ones in dreadful positions.
If we get sick and cannot work for an extended period, you could run out of sick and annual leave and put yourself in a position to default on your mortgage and have the bank foreclose on your home. Whilst you are still sick and trying to get better, you and your family could find itself without a home and potentially bankrupt. Worse still, if you die, your partner may not be able to keep up with paying the mortgage whilst at the same time taking care of your children’s emotional needs.
So what forms of insurances are there and what do they do? There are 4 broad forms of “risk” insurances that financial planners will talk and discuss with you. They are:
- Death Cover;
- Total and Permanent Disablement Cover;
- Income Protection; and
- Trauma Cover
Most of us have heard of Death Cover and Income Protection. In the even you die, death cover will provide your estate with a lump sum of money (the amount you insured for) which can be used for things like paying off the mortgage, providing money for children’s education and of course pay for the funeral, to name a few.
Income protection will provide you with a replacement income in the event you cannot work due to illness or injury (no not for quitting your job as has often been asked of me). There is a waiting period before your payments commence, this being the amount of time you must wait before the insurer commences paying you your income. This could be 14 days, 30 days, 90 days, 6 months and two years. There is also a payment term for how long the payments remain in force which can be 2 years, five years or to age 65, as examples. Most insurers will allow you to insure up to 75% of your gross income and also include super payments as a top up as well.
So what is Total and Permanent Disablement Cover? This cover is related to Death Cover where you are so injured or have succumb to an illness or disease such that you are extremely disabled and unlikely to ever get better. Think of things like quadriplegia. So why is this cover important? Well, if you do not take out this form of cover and suffer a severe car accident where you become quadriplegic but still alive, you would not receive a death cover payment but still suffer from not being able to work and earn an income putting your family at financial peril.
Depending on the form of Total and Permanent Disablement, you may get a payment under an income protection cover, but generally speaking there are significant capital expenses related to TPD events such as renovations to homes and ongoing medical expenses that a lump sum of money can provide assistance with to top up your income protection cover. In some cases, you may not get payments under an income protection policy.
What about this Trauma cover? Trauma cover specifically covers for listed and defined medical events such as heart attack, stroke, cancers, depression to name a few. With a lot of these medical events you will generally not receive a payment under a death cover or TPD policy as you are neither dead nor totally and permanently disabled. There are payments under Death cover if you are terminally ill with payment occurring prior to your death to help put your affairs in order. Also with a lot of trauma type events and advances in medical treatments, you may still be able to work, depending on your occupation and treatment and waiting periods. Some cancer patients receiving chemo will be able to resume work quickly after each treatment and may not meet the waiting periods for payment under an income protection policy.
A good financial planner and a good risk plan will look at:
- Your personal and financial circumstances and that of your spouse or partner;
- Your level of assets and debts;
- Your wishes for your spouse and children (education etc);
- What insurances can be owned inside and outside of super;
- Your family budget and spare cash to fund insurances;
- A proper and realistic assessment of the “insurance gap” you have that needs to be filled;
- Utilising a combination of one or more of these 4 insurances to provide complete protection; and
- Whether some trade off needs to be raised and explained in what level of cover you should have and what realistically you can afford to ensure a fuller protection coverage is provided to you and your family.
For any questions on your risk insurance needs or to discuss your full financial planning needs, please contact Steve Wilson to arrange for a meeting.
Getting this right is not only a logically smart move; it can give one a strong peace of mind.