Having insurance is one of the most valuable assets you can ever own. Yes, insurance is an asset, though hopefully you will never need to use it.
Life insurance will pay a lump sum to your nominated beneficiary upon your death or in certain circumstances, when you have been diagnosed with a terminal illness. Whilst you will no longer need the funds, your loved ones may! It can replace the wages you will no longer earn, pay for education of children, have a partner take an extended period off work or even buy assets for your family so that they don’t have to work in the future as hard as you have.
Total and Permanent Disability (TPD)
This insurance aims to cover you in the event that you can no longer work. Whilst there are specific definitions on what TPD means, it is an essential form of insurance. Just because one can never work again, doesn’t mean that one will no longer incur expenses. In fact, they’re more – there’s still food and all of the basics, yet now there would be increased medical bills.
Income Protection / Salary Continuance
These insurance policies cover a portion of your wage if you cant perform a few major functions of your job. Income Protection is paid for out of your own cash-flow, and is tax-deductible, whilst Salary Continuance is similar to income protection but is paid by, and out of your, superannuation. For Salary Continuance, premiums are paid for out of your superannuation balance, the premiums are not tax-deductible (though you may be able to make tax-concessional contributions to match the premiums) and the benefit is usually only for a maximum of two year. For both, in most instances, the insurance will cease once you return to work.
There are a few specifics with income protection to consider:
– there is a waiting period, which is the period for which you have to wait before your insurance starts paying;
– the benefit period, which is how long you will be paid for if you remain unable to work. These can be 2 years (like with Salary Continuance), 5 years, to Age 65 and some are even to Age 70;
– the benefit amount, which is the maximum you will be paid. This usually represents 75% of one’s wage, though it may be less. There are some that also include an additional amount for superannuation contributions;
– level or stepped premiums, which is a choice you make around the potential annual increases in premiums. It is based on the premise that as you age, your chances of having an insurable event increase. Here, a stepped premium policy will be cheaper in the earlier years and higher in the later years. A level premium policy stays the same over time, with a few rare exceptions. Level premiums cost a little more in the early years but a lot less in the later years, so much so that they are far more cost-efficient over the long run.
Trauma / Critical Illness
This cover is often the one that is ignored, though it never should be. There are many instances where one suffers a major injury / illness / disease and not be totally and permanently disabled nor stay off work for an extended period of time. That doesn’t mean though that you wont incur significant costs or stress.
This type of policy will cover you for a number of major conditions, and pays a lump sum for you to do as you choose. For example, heart problems, strokes or cancers may not have you off work for more than a few months but the costs can be staggering. Further, after such an event you and your partner may want to take some time off work to de-stress. You may want to use the funds to seek medical treatment overseas. It’s important to have this cover and equally important for us to work together to identify what you need the cover for.
Buy and Sell Policies
Here, you and a business partner have appropriate levels of cover with the aforementioned polices so that if one suffers an insurable event, then the other doesn’t suffer financially. You ‘cross-insure’ each other. The premiums may be tax-deductible to the individual or to the business, depending on how they are set up.