Personal Insurance
Having large amounts of debt is the new norm in our current economy to create wealth.
Having financial dependents that rely on income creates risk. Therefore, having an appropriate level and structure of insurance reduces that risk to keep on taking opportunities to create wealth.
Personal insurance includes Life, Total Permanent Disability, Income Protection and Trauma insurance that provides lump sums and income streams for unexpected events that cause injury, illness or death.
Personal insurance is a fundamental component of financial planning, providing a safety net that helps protect you and your family from financial hardship in the face of unexpected events. Whether it’s life insurance, income protection, trauma insurance or total and permanent disability (TPD) insurance, having the right cover can offer peace of mind and financial stability. Tanner Jordan Wealth aims to provide an in-depth look at personal insurance in Australia, its importance, types and how a financial planner can assist you in making informed decisions.
The Importance of Personal Insurance
Financial Security:
Protects your family’s financial future in case of your death, serious illness or injury.
Ensures that debts, living expenses and other financial obligations are met.
Peace of Mind:
Reduces anxiety about unforeseen events by providing a financial safety net.
Allows you to focus on recovery and family without worrying about financial strain.
Income Protection:
Replaces lost income if you’re unable to work due to illness or injury.
Helps maintain your standard of living and meets ongoing financial commitments.
Debt Repayment:
Ensures that your debts, such as mortgage and personal loans can be repaid without financial hardship.
Protects your family from the risk of losing their home or assets.
Types of Personal Insurance
Life Insurance:
Purpose: Provides a lump sum payment to your beneficiaries upon your death.
Uses: Pays off debts, covers living expenses, funds children’s education and supports your family’s financial needs.
Total and Permanent Disability (TPD) Insurance:
Purpose: Provides a lump sum payment if you become totally and permanently disabled and are unable to work.
Uses: Covers medical and rehabilitation costs, home modifications and ongoing living expenses.
Trauma Insurance:
Purpose: Provides a lump sum payment upon diagnosis of a specified critical illness or injury (e.g. cancer, heart attack, stroke).
Uses: Covers medical treatments, rehabilitation and other associated costs, as well as helping with lifestyle adjustments.
Income Protection Insurance:
Purpose: Replaces a portion of your income if you are unable to work due to illness or injury.
Benefits: Typically covers up to 70% of your pre-tax income, paid monthly.
Uses: Covers living expenses, mortgage payments and other financial obligations.
Key Considerations When Choosing Personal Insurance
Coverage Amount:
Assess your financial obligations, including debts, living expenses and future goals to determine the appropriate level of cover.
Consider inflation and potential future needs when deciding on the coverage amount.
Policy Terms and Conditions:
Understand the terms, conditions and exclusions of the policy.
Check for specific conditions under which benefits will be paid and any limitations.
Premiums:
Compare premiums from different insurers and consider how they fit into your budget.
Understand the difference between stepped and level premiums. Stepped premiums increase with age, while level premiums remain constant.
Waiting and Benefit Periods:
For income protection insurance, consider the waiting period (time before benefits commence) and the benefit period (duration of payments).
Choose periods that align with your financial situation and emergency savings.
Policy Ownership:
Decide whether to hold your insurance within superannuation or outside of it.
Holding insurance within super can provide tax advantages but may have different terms and conditions.
Certain insurances can also provide tax benefits if owned personally.
Role of a Financial Planner in Personal Insurance
A financial planner plays a crucial role in helping you navigate the complexities of personal insurance:
Needs Assessment:
Conduct a thorough analysis of your financial situation, including income, debts, expenses and future goals.
Determine the type and amount of insurance needed to protect your financial well-being.
Policy Selection:
Compare policies from various insurers to find the best fit for your needs and budget.
Provide detailed explanations of policy terms, conditions and exclusions.
Customised Advice:
Offer tailored advice based on your specific circumstances, such as family situation, health, occupation and lifestyle.
Ensure that your insurance cover evolves with your changing needs over time.
Application Assistance:
Assist with the application process, including medical assessments and paperwork.
Liaise with insurers to streamline the process and address any issues that arise.
Claims Support:
Provide guidance and support during the claims process, ensuring that you receive your entitlements promptly.
Advocate on your behalf in case of disputes with insurers.
Regular Reviews:
Conduct regular reviews of your insurance policies to ensure they remain adequate as your circumstances change.
Adjust cover as needed to reflect changes in income, family, debts and other factors.
Case Studies: How Personal Insurance Provides Protection
Life Insurance:
Scenario: A 40-year-old individual with a mortgage, two children and a spouse who relies on their income.
Outcome: Life insurance provides a lump sum payment upon death, allowing the family to pay off the mortgage, cover living expenses and fund children's education.
TPD Insurance:
Scenario: A 35-year-old tradesperson suffers a severe accident, resulting in permanent disability and inability to work.
Outcome: TPD insurance provides a lump sum payment, covering outstanding debts, medical expenses, rehabilitation, home modifications and ongoing living costs.
Trauma Insurance:
Scenario: A 50-year-old executive is diagnosed with cancer, requiring extensive treatment and recovery time.
Outcome: Trauma insurance provides a lump sum payment to cover medical expenses, allowing the individual to focus on recovery without financial stress.
Income Protection Insurance:
Scenario: A 30-year-old professional suffers a serious illness, rendering them unable to work for an extended period.
Outcome: Income protection insurance replaces 70% of their income, ensuring they can meet living expenses and financial obligations during their recovery.
Common Misconceptions About Personal Insurance
"I Don't Need It":
Many believe they don't need insurance, especially if they are young and healthy. However, unforeseen events can happen to anyone at any time. The younger and healthier you are, is the best time to get insurance, as you can lock in a level premium and have no exclusions or loadings on your policy. This will provide you with the best cover whilst locking in a cheap premium over your life time.
"It's Too Expensive":
While insurance premiums are an additional expense, the cost of not having insurance can be far greater in the event of serious illness, injury or death. If you want to accumulate wealth, you have to have safeguards in place to protect your wealth.
"I Have Enough Through My Super":
Insurance through superannuation often provides basic default cover, which may not be sufficient to meet your needs. This is referred to group insurance, which is very poor cover compared to what’s available in the market. Default cover is the same cover provided to all its members in the Super Fund, however, everyone has different assets, liabilities, incomes, kids and goals, so it’s most likely your insurance with your Super is not right for you. Reviewing this cover is essential.
"It's Too Complicated":
With the assistance of a financial planner, navigating the complexities of personal insurance becomes manageable, ensuring you have the right cover in place.
Personal insurance is a vital part of a comprehensive financial plan, offering protection and peace of mind for you and your loved ones. Understanding the different types of insurance, assessing your needs and selecting the right policies can be complex, but the benefits far outweigh the challenges.
FAQs
Q: What types of personal insurance should I consider?
A: Key types of personal insurance include life insurance, total and permanent disability (TPD) insurance, trauma insurance, and income protection insurance. Each type of insurance provides financial protection against different risks. A financial planner can help you determine the right coverage based on your needs and financial situation.
Q: How do I determine the amount of insurance I need?
A: The amount of insurance you need depends on your financial obligations, income, lifestyle and future goals. A financial planner can conduct a needs analysis to estimate the coverage required to protect your family and assets adequately.
Q: Can I hold personal insurance through my superannuation?
A: Yes, you can hold certain types of personal insurance, such as life, TPD and income protection insurance, through your superannuation. This can provide tax benefits and ease your personal cashflow. However, it’s essential to understand the terms and conditions and ensure the coverage is adequate.
Q: Why does Tanner Jordan Wealth believe Personal Insurance is so important?
A: Nowadays people have extraordinary amounts of debts due to the increase of asset prices (e.g. property). Therefore, when you rely on a member of a household for income to meet your debt obligations, it’s imperative you have measures in place to protect you and your family if an unforeseen event would occur causing death, injury or illness. The stresses that come along with having a family (a partner and kids) can be overwhelming, therefore having safeguards in place can help reduce these stress levels significantly.