Australians merrily take out car insurance without a second thought but are more reluctant when it comes to protecting their family and lifestyle. It’s not surprising then, that we are seriously underinsured.
So, what are the different types of insurance that should be considered?
- Life insurance – provides a lump sum to your family or nominated benefi ciaries should you die.
- Total and permanent disablement insurance (tPd) – provides a lump sum if you are permanently unable to work again.
- Trauma insurance – provides a lump sum upon diagnosis of a critical illness such as cancer, stroke or heart attack.
- Income protection insurance – provides ongoing income (up to 85 per cent of your employment related income, including superannuation) if you can’t work due to illness or injury
Are you underinsured?
It’s not uncommon to underestimate the amount of money families require when insurance payouts become relevant. According to a recent report by actuaries Rice Warner, Australian families claiming a life insurance payout will on average only receive 42 per cent of the funds they require. The fi gures are even lower for TPD and Income protection cover. Can you believe existing TPD cover is only suffi cient for about 14 per cent of the population and Income protection is marginally higher at 16 per cent. 1 Rice Warner Media Release 02/12/13 ‘Proper adequacy in life insurance means looking beyond rising premiums’
Using superannuation to pay
In reality, insurance cover can be more affordable than you think, especially as you may be able to pay for some of the cover through your superannuation fund. This means cash fl ow concerns shouldn’t be a reason to remain underinsured.
The way you fund your insurance can be complex, with many issues to consider. For example, premiums on income protection insurance are tax deductible. So if you are on a high marginal tax rate, you might be better off holding this type of insurance outside your super.
While TPD is often held inside superannuation, specific advice must be sought regarding whether you choose “any” or “own” occupation. Although a lump sum will always be paid if you successfully make a claim, being able to access it prior to age 55 can be an issue.
Providing protection for your family is the cornerstone of a wealth creation plan. Implementing the right risk strategy is paramount.