Risk management and personal insurances must be considered as an integral part of the financial planning process. For example, have you thought about how your family or your partner would cope financially if you died? Personal insurances can help to ensure that those who depend on you will not be financially disadvantaged in the event of your death, a medical crisis or your disablement.

Most people purchase house, car, and health insurance without giving it much thought, but it is a well known fact that most people are either underinsured or uninsured for events such as death, trauma or disablement.

This article discusses the main types of personal insurances – those being life insurance, income protection, trauma insurance and total and permanent disablement insurance.

Life Insurance

Life insurance is really fairly simple – the policy owner receives the insurance proceeds if the insured person dies.

A premium is paid for the selected level of cover and is based on the insurance company’s risk, eg. the older the person, the higher the risk, the higher the premium, or, if the person is a smoker or pursues hazardous leisure activities, the higher the risk and the higher the premium.

Life insurance can be taken out inside or outside of superannuation. Premiums are tax deductible inside superannuation, however are generally not deductible outside superannuation. We can help you determine the most appropriate option for you as you need to consider more than just tax outcomes.

Among the reasons why people take out life insurance are to pay out debts, to buy the full share of a business if your business partner dies, to pay for funeral costs and to provide for your family after you have gone.

The sad fact is the majority of Australians are significantly under-insured or do not have any life insurance.After realising you need life insurance, the question then becomes – how much? There are various formulae that can be used and most take into consideration your age and the age of your dependents, your current income and lifestyle and debts, including any mortgage.

Generally, younger people require more life insurance as older people typically have less debt and their dependents may have grown up and become independent.

The question of how much life insurance depends on your own circumstances and should be considered with assistance from the APC team.

Income Protection

Income protection insurance – also referred to as salary continuance – is simply a regular payment made to you should you become disabled or sick and are unable to work for a period of time.

Similar to life insurance, premiums are affected by factors including your age and smoking habits, however with income protection, premiums are also affected by the type of work you do, eg. blue-collar versus white-collar.

Premiums will also be affected by such things as a waiting period and the percentage of salary you want to insure, eg. the shorter the waiting period, the higher the premium – the larger percentage of salary covered, the higher the premium.

The maximum percentage of salary that insurers will cover is often limited to 75%. Waiting periods vary, but generally the shortest is 14 days although it is more common to have waiting periods of one or three months. The waiting period is simply the time during which the insurer won’t pay you. Only when you have been sick or ill for this period can you make a claim.

The length of benefit period is also important and again affects the premium for a policy. The payment periods available include one year, two years or up to age 65.

Trauma insurance

While life insurance is very important to have, in many cases people don’t die quickly from an illness. Instead they are often left with an illness or injury that can last for years. Life insurance may not help in these situations as payment is generally only upon death.

This is where trauma insurance fills the gap. This type of insurance pays a lump sum if you experience one of the specified traumas in the contract. The range of ‘trauma events’ can vary but the vast majority of policies pay out on the main traumas – those being cancer, heart attack, coronary bypass surgery and stroke.

Trauma cover cannot be taken out within superannuation and the premiums are usually not tax deductible. But on the flipside, any claims are received tax free. Premiums again vary according to your own circumstances, similar to life insurance.

So why get trauma insurance? As we mentioned, life insurance is not paid until death (or if a terminal illness is likely to cause death within a specified period). How would you cope if you had cancer and needed to take some time off work to recover? What if you incurred significant expenses to receive the best treatment? It’s not something we like to think about (as is the case for life insurance generally) but that’s exactly the type of situation that trauma insurance provides for.

How much is appropriate and is this type of insurance for you? That’s something that we can discuss with you.

Total and Permanent Disablement Insurance

Total and permanent disablement (TPD) insurance covers you for disability that stops you from ever working again.

It is important to examine the details of the policy, as the definition of TPD can vary markedly from one insurer to another. For example, some provide cover for disablement that prevents you from working in your current job and others cover you where you cannot work in any job. Medical evidence and opinion will be required.

Premiums for TPD insurance are affected again by factors such as age, health, smoking habits and your occupation. This type of insurance can be obtained outside of superannuation. Only certain types of TPD insurance can be obtained inside of super.

You may wonder what the difference is between TPD and trauma insurance. The key difference is the fact that trauma insurance will be paid out if you suffer a specified medical condition, regardless of how well you survive. However, TPD insurance will only be paid if you are unable to ever work again.

These are the main types of personal insurances that are available. It is a good idea to have a check up on how well you are covered and make sure you and your family are protected.

As always the APC team is happy to discuss any questions you may have.