Personal insurance planning

Risk management is an important component to ensure the success and longevity of your financial plan. Planning for unforeseen events will allow you freedom of choice and the ability to protect your assets and sustain your investment portfolio and lifestyle.

Many of us recognise the importance of covering our assets in the event of premature death, especially when we have a mortgage or other liabilities. However, most people overlook the pressure that can be placed on your financial position due to illness or injury. For example, being unable to work due to illness or injury, even if for just a short amount of time, can place a large strain on your finances, making it difficult to meet regular living expenses, let alone continuing a savings regime or debt repayment. Similarly, suffering a medical complaint such as a heart attack, stroke, cancer, major surgery or paralysis is traumatic without adding the financial pressure for medical care and family assistance.

So a comprehensive financial plan should address the following insurances:

  • Death cover;
  • Permanent Disablement cover;
  • Income Protection (temporary disablement) cover;
  • Business expense cover;
  • Key person insurance cover;
  • Trauma insurance; and
  • Health insurance.

Most people overlook the pressure that can be placed on your financial position due to illness or injury

For these reasons, we recommend that you review your current personal insurance requirements. It is important to consider the likely effects a medical incident or premature death would have on your financial plan and family circumstances. Income replacement, continuation of business interests, medical trauma cover, family care costs, rehabilitation expenses, debt repayment and asset replacement need to be examined in the context of your financial plan. Should you wish us to examine your risk management strategy, please contact a Ramshead adviser on 02 8220 7708 for an obligation-free assessment.

The following section is designed to give you a brief overview on the range of common personal insurance products.

Income Protection Insurance

Should you become ill or have a serious accident putting you off work for a prolonged period of time, the lack of income could seriously jeopardise your financial plans and future. This is especially true for those who have outstanding mortgages and personal loans. In these instances, income protection cover should be considered to guard against this scenario.

Income protection is considered one of the the most important insurance covers, as it insures your greatest asset - your ability to earn an income. It is a means of insuring up to 75% of gross employment earnings in case you are unable to work due to accident or sickness.

The Government recognises the need for people to protect their incomes against accidents or sickness, to assist in reducing the social security burden. As a result, premium costs for income replacement insurance are fully tax deductible from your taxable income. Effectively, your premiums will be reduced by your marginal tax rate.

In some cases you can even insure up to 75% of your total income package - which can include superannuation contributions and fringe benefits paid by your employer.

Income Protection is considered one of the the most important insurance covers, as it insures your greatest asset - your ability to earn an income.

There is strong industry competition for this type of insurance policy, which has resulted in a wide variety of policy inclusions. The products vary from being quite simplistic to elaborate policies with many auxiliary features.

Another factor to consider is the payment period covered within the policy. There are two time factors to consider - the waiting period prior to the commencement of payments and the period for receiving payments. Payments will be made if you are unable to work or generate your income beyond the waiting period. Payments will cease once the payment period has expired or you are able to return to work. Policies are available with waiting periods from 14 days to 2 years, and policies are generally payable up to either 2 years, 5 years, age 55, age 65 or for the remainder of your life. The correct strategy to implement depends on your budget, your level of emergency funding and the nature and extent of other contingency plans. For example, extended periods of paid sick leave, annual leave or long service leave are likely to influence your selection of waiting period. Your intended retirement date and savings regime for retirement funding are the two areas that you would take into account for the payment period.

It is imperative that you seek professional advice regarding the appropriate cover for your individual circumstances.

Business Expense Cover

Business expense cover is usually an additional insurance within an income protection policy. The payment is designed to assist self-employed persons to cover fixed expenditure for a limited time, generally one year. The premise of the insurance is to assist the business to continue in the event of a temporary illness or injury.

To determine the appropriateness of this style of insurance for your situation, we recommend you contact our office.

Death Cover Life Insurance

Generally, two types of death cover are available in Australia: The first is under a permanent whole of life policy while the second is established as a temporary term life policy, which is probably the vast majority of new policies these days. Essentially, life insurance provides a lump sum amount to your estate or nominated beneficiaries in the event of your premature death. In both cases, the premium paid covers the life insured for the term of the policy, with the lump sum being payable to the beneficiary in the event of death prior to the expiration of the term.

Life insurance is generally recommended to protect the value of your assets that are encumbered, such as a home mortgage or other outstanding debts. Another use for this policy is to provide a continuing income stream to your family or dependents. However, the major difference between the policies is that permanent insurance sets the premiums at the start date whereas term life premiums are reviewed regularly and generally increasse in accordance with age. Because of this, premiums for permanent insurance appear quite high in the early years and conversely, premiums for term insurance are relatively more expensive in the latter years of a policy.

Professional advice regarding appropriate life insurance cover to meet your needs is recommended. Please contact us to discuss your life insurance needs.

Total and Permanent Disablement (TPD) Insurance

TPD provides a lump sum to you in the event of your total and permanent disablement. Whilst the definitions of disablement vary amongst insurance companies, the purpose of this type of cover is most beneficial to people who are no longer able to work as a result of an accident or medical condition. We can assist you to determine the appropriateness of this cover for your individual circumstances.

Trauma Cover

Most people understand the importance of life insurance to their family in the event of their death. However, many fail to consider the financial ramifications of a major medical trauma or prolonged illness on their loved ones and financial position.

Trauma insurance will provide assistance by way of a lump sum payout in the event of you suffering one of a range of common pre-determined major medical conditions. The nature of the policy does not anticipate you to be permanently or temporarily unable to work nor is there an expectation that you will not survive the trauma. The lump sum is often useful in meeting medical expenses, household expenses or even costly renovation or rehabilitation costs.

Key Person Insurance

For business owners, succession planning and business continuation is an important aspect of financial planning. Unfortunately the often too familiar story goes that the business owner has had to wind-up the business when illness or injury strikes, or even that surviving families have had to sell the business assets for less than the actual value to meet inherited liabilities. It is also imperative that business partners and owners acknowledge the options in the event of a death or disability of one another.

Providing options for the business owners and surviving partners and families is often overlooked when establishing the business. So keyperson insurance is often a necessary insurance to ensure the continuing success of the business and Buy/Sell agreements.

 

Please note that the content above is based on our understanding of the current taxation laws and is current as at the 12th of August 2013. You should also obtain a copy of and consider the Product Disclosure Statement for any financial product mentioned before making any decision to acquire a financial product.

This information is of general nature only and is not intended as a personal advice. It does not take into account your particular investment objectives, financial situation and needs. Before making a financial decision you should assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. We recommend you consult a professional financial adviser who will assist you.