Everything you need to know about life insurance

What is your plan b?

Everything you need to know about life insurance

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This article is to compliment the “my millennial money” podcast (episode 141) in which we discuss in detail all the types of personal insurances that are available for you both via your superannuation fund and personally owned. All episodes can be found here.

I expand on the topics in the Barefoot Investor book relating to life insurance. While I would encourage anyone to read this book to take action, I would not encourage anyone to call their super fund and take out additional insurance via your super fund. Therefore, in this instance, I disagree with the comments in the Barefoot Investor surrounding insurance.

I would encourage anyone to reach out to me and have me connect you with a financial adviser who can set up some quality insurances for you.

A sound financial house

I believe you need to do things in the right order if you want to have a long and prosperous financial future. You wouldn’t build a house without good footings, so why would you do the same with your financial life.

Insurance and therefore the cost of insurance or a personal protection plan needs to be factored into your budget before you start building wealth or savings for financial goals.

Foundation 3: Protection Plan

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The three main categories of life insurance available in Australia

It’s important to understand the landscape of life insurance in Australia, before you make any decisions.

Group Insurance (on balance pretty crappy – but OK cause it’s better than nothing)

Direct Insurance (defo crappy – but better than nothing)

Retail Insurance (the only real option for those serious about protecting themselves or their family).

Group Insurance

This is the type of blanket policy that you will find inside your superannuation fund. It’s the type of cover that may automatically come with your account. Super funds arrange this for their members as a group and the superannuation fund is not the insurance company.

Pros

  • At least you get something, could be cost effective.

  • Sometimes pre-existing health issues can be automatically covered if it’s plan that your employer provides (not that common unless in large firms). These plans are called Group Plans as an employee benefit, generally. It’s best to check with your super fund on this, too.

Cons

  • The policies could be changed without your control to your detriment, you might wake up one day with less cover.

  • It’s a pain in the butt to make a claim.

  • If you’re looking to increase your cover and they ask for some medical information, the policies may not be able to exclude certain body parts – they just will decline the increase as a whole.

  • Premiums may increase as you get older as well as the level of cover decreasing. Yeah, it’s crap. But, you get what you pay for, I guess.

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Direct Insurance

This is the crap that is sold with your credit card, personal loan or direct via the TV. You go direct to the insurer. The issue is while some of the big decent insurance companies that have quality insurance products, they also have a direct line of products which can be seen as low hanging fruit for them to make sales.

Pros

  • TBH, I’m yet to think of any? Maybe if you’re a builder and “need a policy” to get on site. Anyway, don’t get me started about this.

Cons

  • Too many to list, however, the main thing is that it’s not actually that cheap in terms of cost.

  • They also medically underwrite at claim time. That means if you have an illness and make a claim – at that point they will ask your dr for a report to see if you had any symptoms or issues in the past. No certainty here.

  • The death cover can’t be made tax deductible (you can put a retail death policy in super and it’s then effectively tax deductible - not a direct policy).

  • The policies are very poor quality in terms of benefits and definitions. You can’t have an income protection benefit for more than 5 years (that I have seen).

  • Not guarantee renewable, they can cancel the policy any time and may not provide you with the change to claim on the same body part / medical condition for income protection multiple times.

  • You also can’t set up a policy based on a level premium (i.e. the premium doesn’t increase year-on-year because of your age)

Retail Insurance (this is the good stuff)

This is the stuff you need if you want to be serious about setting up your sound financial house and protecting yourself and/or your family long term.

You need to receive financial advice from a financial adviser to obtain these policies. These policies are far more superior than any group or direct product available.

Don’t be worried about seeing a financial adviser, even if you are 22 years old and only need an income protection policy. You are important and if you think you’re not “rich enough” to see an adviser – get rid of that thought.


Pros

  • They are not group policies or direct insurance hehehe

  • Fully medically underwritten (they check your medical history then agree to issue the policy).

  • Speed and certainty at the time of a claim (many times your listed adviser will help with any paperwork, too!)

  • The policies are guaranteed to renew – once they are issued they will renew each year as long as you keep paying.

  • Income protection can have a benefit be paid until you’re age 70.

  • You are fully covered for accident and illness 24/7 worldwide (unless you disclose you’re going on a holiday to Syria at the time of application – they would have an exclusion while you’re there!).

  • The ability to lock the price in at your age of application so the cost does not increase year-on-year because of your age.

  • Can be funded by your superannuation to ensure maximum tax effectiveness. Sometimes cheaper than direct and a million times better.

Cons

  • If you have health issues, the application process might take some time if the insurance company needs to write to your doctor or if they asked for a blood test or any other underwriting information.

  • I actually can’t think of any cons in comparison to the group and direct insurance.

The four main types of insurance that you need to know about

All of these four insurances can be called “life insurance” as they are all insuring your life.

  • Death cover

  • Total & Permanent Disability (TPD) Cover

  • Trauma or Critical Illness cover

  • Income Protection (or salary continuance)



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Death cover

What triggers a payout: Your death or generally upon 2 doctors stating you have less than 18 months to live (on all retail policies, check your group and direct policies).

How is it paid: A lump sum.

How can I pay for it: Your bank account or from your super fund.

When do I need it: If you have financial dependents and debt that needs to be cleared for them.

Is it tax deductible: Yes, if paid from a super fund, it’s deductible to the super fund. You could then salary sacrifice pre-tax to your fund therefore making the cover tax deductible. Death proceeds in Australia are generally not taxable, so you do not need to increase your death cover amount to cater for this.

TPD cover

What triggers a payout: You being totally and permanently disabled due to accident or injury and after three months being deemed by a medical professional that you’re able to work* ever again. This does include mental health, not just an image of someone laying in a bed unable to walk ever again.

How is it paid: A lump sum.

How can I pay for it: Your bank account or from your super fund.

When do I need it: If you do not have enough money saved to pay off your mortgage, buy a home and to fund your retirement (basically most people need this, if you’re 21 or 51!).

Is it tax deductible: Yes, if paid from a super fund, it’s deductible to the super fund. You could then salary sacrifice pre-tax to your fund therefore making the cover tax deductible. The payment made from super would be taxed, so you really do need financial advice to work out if you need to up the cover to pay any tax.

*In super, your TPD definition will be “any occupation”. This means that if you can work in “any occupation” that you’re reasonable trained for or suited to.  You can have a linked amount of TPD cover which is held outside of super that is “own occupation”. This is a stronger definition, so if you can’t work in your “own occupation” ever again, you would be eligible to claim. They’re not going to make an accountant or engineer go to work in a grocery store if they had an “own occupation” definition. Statistically most “own occupation” claims would have been paid on the “any occupation” definition but you get one shot at this – so get advice!



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Trauma cover or Critical Illness

What triggers a payout: 95% of all claims are paid upon diagnosis of a heart attack, cancer or stroke – across all ages. There are generally over 40 critical illnesses covered on a good retail policy. I.e. major burns, coma, loss of limbs, intensive care/life support etc (if you were in a car accident for example).

How is it paid: A lump sum.

How can I pay for it: Your bank account – this can’t be funded by your super account.

When do I need it: If you wish to have a buffer in place for medical expenses or some extended leave from work for you or your spouse, if you were diagnosed with a life threatening illness.

Is it tax deductible: No. However, the claim payments are tax free.


Income Protection

What triggers a payout: If you’ve been off work due to any accident or illness during the set waiting period. Generally, it’s a 30-day waiting period. 90 days if you have your full emergency fund in place, to cover the loss of income over the first three months. You are not paid during the waiting period.

How is it paid: Via monthly installments in arrears. You can insure 75% of your pre-tax income including superannuation. It would be paid for as long as the benefit period is (i.e. age 65 or 70) or until you return to work. Whatever comes first. You can also receive a TPD or Trauma lump sum and still receive your income benefit.

How can I pay for it: Your bank account or your super with a small portion paid via your personal bank account.

When do I need it: If you have an income that you rely on (aka… everyone, unless you have enough wealth to fund your life and you’re only working for the social benefit!).

Is it tax deductible: Yes! However, your monthly income installments are taxed as income.

 

How much cover do you need?

Death cover: I would think enough to pay off the family home or buy a home if your family is renting and then possibly 10 years’ worth of income for your spouse and family.

TPD cover: Enough to pay for a home to live in and medical expenses (say, $100k) and then possibly an amount to fund your retirement living expenses. You would also have Income Insurance, so if you couldn’t work ever again, you would have a home paid for and then your income until age 65 or 70.

Trauma cover: My rule of thumb is $100k for medical expenses and if you earn over $100k, do a year’s worth of gross income, too. This is just to manage the cost of the premium for those earning under $100k. I would always recommend at least $100k of Trauma cover

Income Protection: 75% of gross income and super (total employment package). Always do at least age 65 benefit period and only do a 90-day waiting period if you have a fully funded emergency fund, to cover the first three months or if you have a crazy amount of sick leave or long service leave that you may wish to take on the risk. The longer the waiting period, the lower the cost.

Most people reading this should seek a 30-day waiting period. An adviser could get creative if you have a high-risk occupation and need to pay more – she or he may split the benefit up and put half on 30 and half on 90. Get advice!

Premium types

Stepped premium – each year the premium steps up and increases as you get older. So, it’s cheap when you take the policy out but will get more expensive over time.

Level premium – the premium is based on your age at application and does not increase year-on-year because of your age.

A lot of financial advisers are torn on this and will land in one camp or another. I’m generally a fan of level premium (my own policies are all on level) but I have a brain, so in some instances a stepped policy or blend may be required. Get a level premium with a good quality insurance company that has a long track record and get on with your life! Minor reviews and tweaks may be required over time. You do not need to chase a cheaper new policy every year like your car insurance.

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Commonly asked questions

Am I covered if I lose my job?

With income protection insurance, you’re only covered for accident or illness. Generally speaking, you would only insure yourself for things you can’t control. If you lost your job, you would be able to get some part-time temporary work if it was a dire situation. You should also have an emergency fund of 3 months of cash, if possible.

I’m young & single, I have no kids, and no debt. Do I even need insurance?

Yes. If you are working for an income, it means you need money to live. If this is the case you need to protect this. If you think you do not need to protect your biggest asset, which is your income - why would you bother insuring your car? It’s not work nearly as much!

What is the absolute priority in order, if money is tight?

If you have kids or a family:

Death Cover, Income Protection, TPD, Trauma.

If you’re single:

Income protection, TPD then Trauma (however, most TPD policies should be linked to death, so you’d get it anyway).

I would still get all four covers while you’re young. The reason is, cover is locked in while you’re healthy and at a young age. If your health changes in the future, you may not be able to get insurance at a good rate.

What if I can’t medically get insured with a good retail policy?

You would keep any cover in place that may be a default option in your super. You can then see an adviser who may have access to accident only income insurance or death cover for you.

If my spouse does not work outside of the home, do we need insurance for them?

Yes! If your spouse was to die, become disabled or suffer a traumatic illness, you need to ensure that all debt can be cleared and an amount to possibly provide for a nanny/housekeeper for death/TPD. For trauma insurance, you would want at least $100k for medical expenses for your non-working spouse and possibly some income replacement should the main income earner need to take time off work.

Can kids be insured?

Yes, generally speaking, any child in good health and over 2 years old can get a child cover policy. This is like a trauma policy but for kids. The maximum you can insure your children for is $200,000. The insured amount would be for medical expenses or to enable the parents to take leave from work should a traumatic illness occur on the life of the child.

Got a question? Flick me a message on insta.