Understanding Different Personal Insurance Products
We all work hard to grow our wealth and set ourselves and our families up for financial security. So, what happens when something goes wrong? Accidents and illness can happen with no warning, and can financially cripple those unprepared. This is where insurance comes in – but with so many different options, it can be hard to know exactly which one is right for you and your circumstances. Let’s look at the four key types of personal insurance products, what they will cover, and importantly, what they won’t cover.
Life Cover
Life cover is arguably the simplest form of all personal insurance products – it pays a lump sum amount when you die, and that money goes to your nominated beneficiaries. If you do not have any beneficiaries nominated, then the superannuation trustee or your estate decides where the money goes.
Calculating how much Life Insurance you require typically involves understanding the amount of money your beneficiaries would need after you pass away, to cover things like the mortgage and other debts, education fees, living expenses etc. Also take into account any assets that can be disposed of upon your death, e.g. superannuation, savings, investments etc.
Total & Permanent Disability (TPD) Cover
TPD cover pays a lump sum if you become totally and permanently disabled because of illness or injury. Insurers typically offer cover for either of the following:
- Your own occupation: Paid out if you are unable to work in the job you had before your disability. This type of TPD cover is generally more expensive, and usually available only outside superannuation.
- Any Occupation: Paid out if you are unable to work ever again in a job suited to your education, training or experience. This type of TPD cover is often cheaper, but less likely to pay out as it has a higher claim threshold.
Deciding if you need TPD cover, and how much, is a bit like life insurance in that you need to know what costs are required to be covered if you become disabled and are therefore unable to work. Such costs include living expenses, mortgage and other debts, medical & rehab costs, and retirement savings. Other sources could assist with some of these expenses, including private health insurance or income protection insurance, or cash brought in from the sale of assets or investments.
Income Protection
Income protection insurance pays part of your lost income if you are unable to work because of a disability caused by illness or injury – up to 90% of your pre-tax income in the first six months, and up to 70% for a specified time after six months. Income protection insurance is designed to replace your income based on your annual earnings in the 12 months prior to your illness or injury. Each income protection policy has its own definition of partial or total disability that must be met before a claim is made.
“Indemnity value” income protection policies insure you for a percentage of your salary at the time you make a claim (as opposed to your salary at the time the policy commenced). Note, “Agreed value” policies were once an option, but have not been available to new customers since March 2020. Waiting periods apply to income protection policies – anywhere from 14 days to two years, and longer waiting period often reduce the premiums on a policy. When choosing your waiting period, consider how much cash you have aside in terms of emergency funds, savings, and leave, with the knowledge that benefit periods often cover up to age 65. A longer benefit period usually drives up the price of an income protection policy.
Trauma Cover
Also known as “critical illness” or “recover insurance”, trauma cover pays a lump sum amount it you suffer from a critical illness or serious injury. This may include a heart condition, cancer, stroke, or significant head injury (note it does not include mental health conditions). While different trauma policies cover different things, it can usually help to pay for out-of-pocket medical expenses, living expenses for your family if you’re unable to work, changes to housing if required, or to pay down debt (e.g. your home loan).
When deciding if trauma cover is right for you, consider if you have any existing income protection or private health insurance that can help cover expenses or replace lost income. It’s also important to note what is covered in a policy you are considering, as well as its exclusions, waiting periods, cover limits, and premiums.
Personal Insurance Products: Types of Premiums
For all of the abovementioned policy types, your options for paying premiums are typically stepped or level:
- Stepped Premiums: Recalculated at each policy renewal, increasing year-on-year as you are more likely to claim as you age.
- Level Premiums: A higher premium is charged at the start of the policy, but changes to costs aren’t based on your age so any increases happen more slowly.
Speak to your Trusted Financial Adviser about Personal Insurance Products
The most important thing you can do when deciding between personal insurance products is to speak with your trusted financial adviser. They will help you make the right decision based upon your unique circumstances, needs, and your assets – and determine exactly what type of cover is required, and for how much. They can also explore any existing cover you hold (including those within superannuation accounts) and determine if they provide a sufficient level of cover.
If you don’t have a financial adviser, please reach out to the Life Risk Insurance team at Priority Advisory Group on 02 9415 1611, or get in touch via our website. Also be sure to visit our Youtube Channel for podcasts on insurance and much more!
Author: Greg Vock
As a Financial adviser with a special interest in Life Risk Insurance, Greg has over 20 years in the Financial Services industry, and enjoys working with a broad range of clients and securing their wealth for the long-term. He builds on his Graduate Diploma of Financial Planning and Advanced Diploma of Financial Services (Financial Planning) with invaluable experience in helping clients manage risk and look after their hard-earned wealth.
In his free time, Greg enjoys going to the gym and spending time with his family.
Please note the information provided within this article is general of nature and is not a personal advice recommendation. Prior to considering strategies discussed in this article we recommend you seek personal financial advice. Please be aware that, without the benefit of financial advice, you may be committing yourself to financial strategies or products that are not appropriate for your overall personal situation, needs and objectives.