"I am 55 years old and have basic life insurance with my Superannuation. How do I know if this insurance will be enough for my Husband and 2 school-aged children if I were to pass away considering I am the sole breadwinner?"
-Nicole in Fremantle, WA
Top answer provided by:
This is a great question. Many Australians only have the insurance that they were given a long time ago inside their superannuation funds. While every little bit will help if the worst does happen, it is really important to understand what insurances are available, and how you are covered.
There are 4 main types of personal insurance:
- Life (Death) Insurance
- Total and Permanent Disability (TPD) Insurance
- Trauma (Critical Illness) Insurance
- Income Protection (Temporary Disablement Insurance)
Life insurance, as the name suggests, pays a lump sum amount to a nominated beneficiary (or the estate), of someone who has died.
Life Insurance is the simplest insurance to understand, but how do you work out how much you need?
This question is different for everybody, not only because of their financial situation but also their perception of how the family they leave behind will recover. Fundamentally, how will the people in your family move forward financially after your death?
Things to consider are:
- How will they pay for the funeral
- What does the remaining spouse earn, and will that pay for everything your family needs? Think about:
- Schooling Costs
- Other large costs
- Day to day costs of running a household
- How much time before the remaining spouse is likely to return to work? How much income needs to be replaced by the insurance.
- Will they downsize the house?
- Will they return to work?
- What amount of grieving time do they need?
Remember the above are tips to think of in working out the amount of cover you need. The reality is that the beneficiary of the insurance payment can spend the money however they see fit.
Total and Permanent Disability Insurance
Total and Permanent Disability Insurance (TPD) is paid out when you are classified as never being able to work again, generally by 2 separate doctors. This generally refers to any job or position that you have held in your working career.
There are policies and features that vary this definition slightly however this is the base premise for TPD insurance.
Most people think of TPD as insurance that pays out if you are in a wheelchair, but there are many diseases and injuries that can make you permanently unable to do your job. Most recently insurers have been making a large number of payments for mental health.
Many of my clients need more TPD insurance than they need life insurance. This is because costs rarely go down, and the income that a household is earning can sometimes stop altogether.
How would you react if your partner became so seriously ill or injured that they could never work again? Would you go to work the next day? Does your employer have carers leave? How quickly would that run out?
Other things to think of are:
- Modifications to Cars
- Modifications to houses
- In-home care
- Wheelchairs (expensive)
It is always worth considering TPD insurance on non-income earners, as their injury or illness could affect the sole breadwinner’s ability to earn.
TPD is a lump sum insurance, meaning that if you claim on it, you will receive a lump sum of money. It is then your job to ensure it can last for as long as possible.
Trauma (Critical Illness) Insurance
Trauma Insurance covers you for specific injuries or illnesses. Approximately 85% of all trauma insurance claims come from coronary bypass surgery, stroke or cancer, although most policies will cover between 20 to 80 different specific injuries and illnesses.
Events that you can claim for trauma insurance are events that don’t generally make you permanently unable to work, but they can cause a large immediate cost to your household. This cost is usually a mix of time off work, specialty medical treatment (that may not be fully covered under your health insurance), and your partner taking time off work to help care for you.
Trauma insurance is also a lump sum insurance that pays if you make a successful claim. At this time it is your choice as to how you use the money.
Trauma insurance is one of the most expensive of all personal insurances, it cannot be paid for by your superannuation fund and it is not tax-deductible. That said, insurance statistics suggest that as many as 1 in 2 people who hold a policy to the age of 65 will make a successful claim on trauma insurance.
Trauma insurance is also difficult to calculate an exact figure as to how much you need, as the illnesses and injuries that it covers you for can range from a mere 6-8 weeks away from work, with only routine (albeit major) surgery required through to multiple experimental surgeries and treatments costing hundreds of thousands of dollars.
Income Protection Insurance
Income protection insurance can cover you for up to 75% of your salary in the event of sickness or illness. Income Protection Insurance pays a monthly payment, which is generally taxable.
Income protection insurance will have a waiting period. This is how long you need to have been unable to work before you can receive your income protection payments. The waiting periods range from 14 days through to 2 years.
An income protection policy will also have a benefit period, which is the length of time that you will receive the payments if you are on claim. These periods range from 2 years through to “age 65”.
Recently income protection insurance has seen significant price rises, and has seen many of my clients review what they spend on a monthly basis, and ensure that their expenses are covered; not their income.
Nicole, to come back to your question, how do you know if it will be enough? Ultimately you don’t know, just you don’t know what day this fateful event will happen, but by working through some what-if scenario’s you can give yourself and your family some confidence that they will be looked after financially.
John Forwood and Forwood Planning Pty Ltd ATF Forwood Planning Trust are Authorised Representatives (No. 1007813/1238510) of Australian Wealth Holdings Pty Ltd (AFSL 481674) ABN 72 608 528 427
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