Income Protection and Life Insurance: Pitfalls, Perks and Common Questions Answered

Anthony Bell

Finance Expert

photodune-655539-business-woman-calculating-taxes-sLife insurance is something that most if not all Australians depending on their financial situation should consider. As a nation, Australia is generally underinsured. Having the right protection in place can ensure that that your family is taken care of and your current lifestyle does not change should you be unable to work for a period of time or indefinitely.

Imagine having to:

  • Sell your home as you can’t afford your mortgage repayments (or your loved having to do the same if you’re no longer around).
  • Borrow money from family or friends to pay for medical bills.
  • Modify your current lifestyle as your take home pay has decreased signicantly.

Getting the right cover that suits you is important. Underinsure and you’re still exposed, but unneeded cover will mean paying high premiums unnecessarily.
There are four different types of insurance in this area; Life, Total & Permanent Disablement (TPD), Trauma and Income Protection.

Life: Your nominated beneficiaries will receive a lump sum payment in the event of your death.

TPD: Covers you for total and permanent disability where you’re unable to return to work. You will receive a lump sum payment.

Trauma: Should you suffer a traumatic condition such as heart attack, stroke or cancer you will receive a lump sum payment.

Income Protection: Should you suffer illness or injury you will receive generally up to 75% of your income for an agreed period (usually available to those under age 65).

Tips and Pitfalls
Here’s a few tips and pitfalls to be mindful of when assessing your own situation and the cover that’s right for you.

Life and TPD

  • If you have a mortgage or have financial dependents make sure you have a level of cover which will wipe out all debt and leave a regular income stream for the family.
  • You can hold this type of cover personally or within your superannuation fund. The upside of holding it in super is that you’re not paying it out of your current cash flow, but remember this will reduce your retirement savings.
  • You can also link Life and TPD together meaning it could save you in costs rather than holding two separate policies.
  • Conditions vary, but generally the older you are the greater the cost to start a new policy and the likelihood for basic medical tests before cover can begin.

Trauma

  • It’s often tough to come up with the right amount of cover. Certainly your family’s medical history will be a good starting point in your thinking as will treatment costs.
  • When shopping around make sure that the particular product you have selected has strong definitions which are most suited to you i.e. if you have a history of a particular disease within the family you want to make sure that the product you have covers this disease as there’s a wide range of policies and different definitions of what is a “traumatic” and when it applies.
  • Trauma cover generally needs to be held in your personal name.

Income Protection

  • Generally most insurance providers will insure you for up to 75% of your regular income.
  • Be sure to check the waiting and benefit periods.
  • The waiting period is the period between when you cease work and when you start to receive payments from your insurer. This can be from 14 days to 2 years; the shorter the period the greater the premium, so consider how soon you really need those payments to kick in to cover your day to day obligations when deciding on your cover.
  • The benefit period is how long payments to you will continue.
  • Policies are commonly held in your personal name as the premiums are usually tax deductible (although they can be held in your superfund).

You may already have cover in place either personally or possibly inside your superannuation fund but it may not be appropriate for you should an insurable event occur. It’s important that you review your current levels and the structure of your cover as it could mean significant premium as well as tax savings for you but most importantly ensure that you can continue your current lifestyle as well as achieving your future goals even if you don’t have the ability to earn an income.

Contact Bell Partners for specific advice.

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