Katherine from Sydney asked:
We are a couple in our 30s with a mortgage, car loan and no kids at this stage. We haven't saved much given our funds were needed to finance other family matters. My husband is in a contract role and I work full time. We also have no insurances - do you recommend we take out insurance - life, income protection, etc and if so, how much? And what does insurance in Super v insurance outside of Super mean?
Top answer provided by:
Thanks for your question. Your situation is not uncommon, it’s tough to build up savings when you’re flat out paying down debt and dealing with the high cost of living. My initial thought is that, these times prior to having children will be vital to reduce your loans as much is possible to place you in a stronger cash flow position when you decide to commence the breeding program.
Again, it’s not uncommon to have not considered insurances particularly when you know it will ultimately increase your expenses and reduce your ability to pay down debt. However it is your jobs that provide the income that keep the home and car loan paid, food on the table and the other luxuries that we take for granted. Consider for a moment that if this income was to stop for a month, a year, or five years and what the outcome would be. Having a high quality income protection policy that can cover up to 75% of your wage each year will help ensure that in the event of accident or illness that your financial situation won’t be a house of cards ready to fall over as soon as the income stops. There are many variations when it comes to income protection so make sure you seek advice to obtain cover that will provide long-term benefits. Income protection premiums are also tax-deductible.
Without insurances such as death, total and permanent disability (TPD) and trauma cover, you could potentially leave yourself in a difficult financial position if someone was to die or suffer an accident or illness. When it comes to deciding how much insurance cover you need, we consider the following points for death and TPD. As a general rule we like to cover all debts, and then provide a lump sum that can provide a regular income based on an expected rate of return. For example, a couple has $300,000 of home loan and would like to provide each other with a yearly income of $30,000 in the event of their death. $30,000 divided by 7% gives a lump sum of $430,000 that is required to produce $30,000 per year in the event of your death, so that’s $730,000 of total death cover. TPD cover could be reduced to cover debt and modifications to your home as long as you have a high quality income protection policy that provides long-term benefits.
The last cover for you to consider is trauma insurance which pays out a lump sum to assist in the recovery from a critical illness such as cancer, stroke, or heart attack as well as a myriad of other illnesses. Generally the levels of cover are not as high as the death or TPD, here we like to provide a lump sum to help with the recovery costs, pay down part of your debts to provide breathing space and bridge the 25% gap between your full wage and the income protection policy.
You have the option to hold death, TPD, and income protection within your current superannuation plans, or owned in your individual or joint names outside of the superannuation environment. Trauma insurance cannot be held within superannuation, as from 1 July 2014.
Owning death and TPD cover within your superannuation provides you with the opportunity for your superannuation fund to meet the ongoing costs of the insurance, leaving you to focus on paying down debt as fast as you can. Or you can decide to contribute to superannuation with pre-tax dollars via a salary sacrifice to cover the cost of these insurances tax effectively. Income protection can also be held within superannuation, but income protection tax-deductible premiums may be more valuable in your own name where tax rates can be as high as 45% compared to the superannuation tax rate of 15%.
Please remember that the above is general advice only and I would recommend that you speak to a suitably qualified financial adviser that can take into account your personal situation to provide recommendations to suit your needs and objectives.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.