The lay of the land for Death, Total Permanent Disability, Trauma and Income Protection Insurance cover. What you know, what you might not know, what you need to know.
Three years ago we published (one of our first!) blog posts Covering Your Six, where we talked briefly about insurance, and some of the aspects to be considered when deciding if it is time for you to take out insurance cover. This article is a continuation of that article, and a more in-depth exploration of four common types of personal insurance, their payment structures, and how your super fund could help you cover the costs of your insurance. Please be aware that this is an informative article; it provides general advice only, not personal financial advice.
Each year thousands of Australians are injured, suffer a serious illness or die unexpectedly. Statistics from the Australian Institute of Health and Welfare show that 1 in 3 men and 1 in 5 women die before the age of 70. Some other pretty hairy health statistics are:
- Around 1 in every 2 Australian men and women will be diagnosed with cancer by the age of 85;
- In 2017 there was a stroke every nine minutes; a total of 56,000 over the calendar year;
- Around 65% of stroke survivors will suffer some type of disability after their stroke, which will hinder their ability to carry out daily living activities without help;
- Every year, around 54,000 Australians suffer a heart attack; that’s one every 10 minutes; and finally
- More than 100,000 Australians who have had a heart attack are under the age of 65.
All of the above statistics have been written in reference to this article, these exact numbers may have changed since the publication of this article.
Statistics like these are quite confronting, and while it is all too easy to think “it won’t happen to me” – insurance is there to ensure that, in case something does happen, you have financial security.
Think of insurance as a layer of financial protection against these types of life events. Having the correct insurance cover in place is an especially important consideration if you have a mortgage, or dependents-even more so if those dependents are young.
There are four main types of personal insurance protection cover; these are income protection, life/death cover, total permanent disability cover, and trauma cover.
Let’s Break Down the Different Types:
Perhaps one of the most common types of insurance cover is Income Protection, or Salary Continuance Insurance, as it is also known. This insurance is designed to provide you with a percentage of your monthly income for a period where you are unable to work. For most policies, it doesn’t matter what illness or injury you are suffering from, or whether it is short term or long term- if your ailment stops you from working and earning an income you can receive monthly payments that replace up to 75% of your income until you are able to return to work.
We previously wrote an article on this subject here: Is Income Protection Insurance Important?
This type of insurance, also sometimes referred to as “Life” cover, gets paid as a lump sum and helps your dependants fund your funeral and legal expenses, clear any outstanding liabilities, and helps your partner maintain their standard of living on one income. Some policies are structured so that if you are diagnosed with a terminal illness and have less than 12-24 months to live the insurer may pay you the benefit early.
Total Permanent Disability (“TPD”):
This type of insurance cover is paid as a lump sum, and is designed to cover you in case you become totally and permanently disabled. This could occur in any manner of incidents or accidents; through a spinal cord injury, the loss of your leg in a car crash, even the onset of Motor Neurone Disease. This type of insurance is designed to cover your expenses should you suffer a condition that prevents you from returning to work ever again.
This type of insurance cover is also a lump sum, that has been designed to protect you should you become critically ill with conditions such as back injury, cancer, heart attack, or most ailments that require extensive medical treatment to recover. We will cover this in more detail later, but this type of cover isn’t often available through superannuation funds.
TPD and Trauma cover kind of sound like the same thing…?
While this is quite a common misconception, no, total and permanent disablement (TPD) cover and trauma insurance are not the same. Although both types of insurance cover can help to support you and your family financially with a lump sum benefit upon a successful claim, the payout is subject to different terms and conditions. For example, if you are diagnosed with cancer and have a trauma insurance policy, you will generally receive payment upon receiving surgery. However, if you have a TPD policy, your claim may only be paid out if the cancer renders you totally and permanently disabled and you are unable to return to work.
In a nutshell, Trauma insurance cover funds the costs associated with improving your health and getting you back to work, whereas TPD insurance cover will ensure you and your family maintain your quality of life should you be totally unable to return to work.
Paying for Your Insurance
The amount that you are charged for your insurance cover is called your insurance “premium”. You can generally choose to pay for your insurance with either:
- Stepped premiums: These premiums are recalculated at each policy renewal; which means that the price increases (steps up) each year. This is based on the higher chance of you placing in a claim as you grow older.
- Level premiums — These premiums are fixed. They charge a higher premium at the start of the policy compared to Stepped Premiums, but the annual changes to your cover aren’t based on your age so the premium increases happen more slowly.
Your choice of stepped or level premiums has a significant impact on how much your premiums will cost now and in the future
What you need to tell your insurer
A common reason for claims not being successful is not disclosing your honest circumstances to your insurance provider. You need to tell your insurer everything that could affect their decision to provide you with insurance cover when you go through your personal statement.
Some information to be disclosed includes:
- Your age;
- Your employment type;
- Your personal medical history;
- Your family history, such as if there is a a history of disease;
- Your lifestyle; for example, if you’re a smoker or heavy drinker; and
- If you partake in high risk sports or hobbies, such as skydiving.
Depending on your responses, your policy might have specific exclusions which narrow the medical definitions you can claim on, or a medical loading which increases the cost of your premium. It is a good idea to chat to your financial planner to ensure you are taking out a policy that is suitable for you.
Insurance in Super, or Out?
A common method of funding insurance policies, is to have all or part of your premium funded from your superannuation. This is an attractive option as the premiums are taken out of your super account balance rather than your cash flow, and it also allows the life insured to receive a 15% tax rebate within the super’s tax friendly environment. However, it is important to note the long term effects this can have on your retirement savings. Your adviser can assist you in creating a well balanced plan which may offset this effect while still allowing you to meet your other goals and cash flow needs.
Benefits of Insurance in Super:
There are a number of potential advantages to holding life insurance through your super fund.
Life insurance through super may be more convenient
As premiums for insurance in super are deducted automatically from your super balance you will not need to be concerned about ensuring your designated bank account has the right amount in it when your premiums are due.
Less Cost to your Bank Account
When you have life insurance through super, the premiums for that insurance cover will be deducted from your superannuation account balance, rather than out of your own bank account. While it does still cost you to pay for those premiums, if you have other financial commitments such as a home loan, then having the premiums deducted from your super account may make it easier on your immediate cash flow.
Potential tax benefits to holding life insurance in your Super
If you opt to have your insurances paid on an ‘annual rollover’ basis from your superannuation, you may be eligible for a 15% tax rebate on the cost of your premium due to the tax efficient environment of super.
Along with the advantages outlined above, there are also some potential drawbacks of holding life insurance through superannuation. These can include the following:
Erosion of your retirement balance
The premiums paid from your super contributions will mean there is less money available for your super fund to invest for your future. This will affect the amount of money that you will have in your super fund at retirement.
Trauma insurance not available
Trauma insurance, as we previously discussed, provides a lump sum of money to cover your immediate medical expenses and other financial needs when a critical illness or injury occurs. Oftentimes, meeting the eligibility criteria for a trauma claim is not equivalent to meeting a ‘condition of release’ for your superannuation funds. As a result, having trauma cover within super can lead to the funds being ‘stuck’ or inaccessible until retirement. Therefore, insurance providers have structured their trauma products entirely outside super to allow the life insured to access their funds shortly after claim.
So, when is a good time to review your insurance cover, or lack there-of?
Any time is a good time to review your personal situation. However there are certain life events which should prompt consideration or review of your cover:
- Starting full time work;
- Getting married;
- Having children;
- Buying property or any other asset involving debt;
- Starting your own business; and
- Putting together a Financial Plan
When determining what type of insurance you need, you may want to ask yourself the following questions:
- How much would your family need to live off if you weren’t around?
- Is the process easy for them to be able to collect the death benefit? Or could the process be difficult and cause additional distress?
- How will your retirement funds be affected from paying premiums out of your superannuation fund? Do you have the means to offset this effect?
Taking out insurance is a highly personal process based on your individual circumstances. Usually this requires a balancing act of deciding what level of risk you are willing to take on, versus, the expense to give you and your family peace of mind and more financial security. If you are unsure, feel free to book in a chat with one of our advisors who can help you work out which cover and at amounts you need, as well as the most appropriate ways to structure your insurance policies.
Don’t wait till it’s too late to think about your insurance
Your current attitude towards your insurance could shape your future and that of your family’s. You should review your insurance needs at least annually to take account of changes in your circumstances. If you are ready to start securing your future or would like to chat with one of our advisers about this topic in more detail, you can use this link to book in for a 15-min consultation.