"My wife and I currently have the minimum death cover through our super, but we’d like to understand which insurances are most essential for our family (we have two small children) and whether we should consider increasing our cover beyond what's included in our super."
-Kain, Concerned Parent
Top answer provided by:
Mark Candy
Hi Kain and thanks for your questions.
First off, congratulations on starting to think about holding some personal risk insurances, and for at least having some insurance cover in place already. This death cover that you hold is likely ‘default’ cover, which is cover that is automatically applied to your super fund, without the need for you to provide any medical history or financial details. Default cover may provide a false sense of security, as it can tend to be quite limited, will reduce your retirement funds progressively over time, and is not always the cheapest, when compared to similar options.
With this said though, I am a firm believer that it is usually better having some insurances in place, rather than none!
As an adviser, one of the questions that I like to ask clients when we are discussing potential risk insurances is “You wouldn’t think of driving your car out of the driveway without insurance, so why don’t you insure yourself, your most valuable asset?”
There is no asset more valuable than you and your health. Without it you cannot work and without work, well, you do not have any income. And while we all want to live a long, healthy life, it’s nice to know that there are not only insurance products available which can help financially protect you, and your family, should you be unable to earn an income in the event of illness, injury or death, but there are also financial advisers that can help you ‘tailor’ such insurance covers to meet your specific needs / requirements.
When determining the most important types of insurance for your family, especially when you have young children, and already have minimal death cover within your Super, it is important that you consider the following types of insurances:
1. Life Insurance:
Provides a lump sum pay out in the event of your death. Can help your family or loved ones continue to pay for the necessities in life, from the basics of food and accommodation, to covering the cost of paying the home loan and future education. This amount tends to be tax free. Premiums can be paid either personally, or through superannuation.
2. Total and Permanent Disability (TPD) Insurance:
Pays a lump sum in the unfortunate event of permanent disability due to an illness or accident that prevents you from ever working again. It can be specific to your Own occupation or a cheaper policy which is based on Any occupation. Becoming totally or permanently disabled can prevent you from earning an income at a time when you have additional expenses to cover such as medical and/or rehabilitation costs that may not be covered by your health fund and can also support you with general ongoing living expenses. Premiums can be paid either personally, or through superannuation.
3. Trauma Insurance (Critical Illness or Recovery Insurance):
Is a lump sum payment on the diagnosis of a specified injury or illness such as a heart attack, cancer, stroke, or paraplegia. It is paid irrespective of your ability to keep working. The money can be used for meeting the costs of living, while you get back on your feet, covering the costs of treatment and medical care that may not be covered by your private health insurance, and any ongoing costs associated with say transport or therapy. Premiums can only be paid personally. This cover cannot be held within a superannuation environment.
4. Income Protection (IP) or Salary Continuance Insurance:
This replaces your income if you are unable to work due to sickness or injury by providing a monthly payment of up to 70% of your pre-tax income. It can help maintain your lifestyle and ensure your cash flow needs and expenses can continue to be met during a period where you are unable to earn an income. You can usually choose a waiting period (this is how long you must be unable to work before the insurance begins to pay you) and the benefit period (how long the policy will pay you if you are unable to work). The premiums are usually tax deductible, when paid personally, which can help make cover more affordable, and can also be paid through superannuation.
How much cover you need, is really a personal choice or decision that you need to decide upon.
Given the fact that you may very well be holding your personal risk policies for many years, it is particularly important to make sure that you are paying for cover that you need. Being overinsured can end up being just as expensive as the consequences of not having enough insurance cover.
Using a Personal Risk Insurance Needs Calculator can help guide you on how much cover you may require based on age, income, assets and debts. Ideally seeking professional advice from a financial adviser can help you find an insurance provider and covers that will best suit your needs.
Additionally, considering the type of premium structure that you choose with your insurance covers is also key. There are two types: stepped and level.
Stepped premiums are cheaper in the earlier years, but they increase each year as you get older because your chances of death, illness and injury increase with age. Level premiums can be higher in the initial years, as they are calculated according to you age when you take out the policy, but they will remain more consistent as you get older, which can make it more cost effective over the longer term, when you may need it the most.
The right mix of these insurances depends on your family's financial situation, debt levels, and lifestyle needs. It is also important to regularly review your policies to make sure the cover remains relevant as your family grows and / or your circumstances change.
I wish you and your family, all the very best for the future Kain.
Mark
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"“As cost-of-living pressures rise, many people are now less certain about their financial situation. They know they need to manage their household balance sheet, and getting professional advice on their life insurance is an important part of that. But this can cost more than $3,000,” she said at the time."
Bill Brown 15:32 on 25 Oct 24