In most cases, a wealth accumulation strategy is incomplete without a corresponding risk management strategy. Where debts are significant and a business or family largely reliant upon the personal exertion of any one person, health and other risks need to be managed through personal insurance and other measures. This is an area of advice which is often not given appropriate attention.
Personal Insurance - Unless a family is exceptionally wealthy, securing insurance for the protection of family interests is a necessary part of life. Where a family is beginning to acquire assets through debt/borrowing, and is wholly reliant upon the income-generating capacity of one or more people, securing assets and the future financial plans of the family through personal insurances is essential.
Life Insurance - This is the most obvious and common type of insurance. Taking out a sum of insurance in the event of premature death, can ensure the family is able to retain assets and maintain their lifestyle. While people themselves can never be replaced, taking action to at least manage the financial implications of a person’s loss is a prudent course of action.
Income Protection Insurance - Unlike Life and TPD insurance which provide lump sums, income protection insurance pays a regular monthly benefit in the event that a person is unable to work for a prolonged period of time through sickness or accident. Usually this benefit payment is limited to 75% of the person’s salary.
There are a number of issues to consider when applying for Income Protection insurance, including:
- Whether the sum insured includes an allowance for continuing contributions to superannuation (eg. the employer 9% superannuation guarantee)?
- What the waiting period should be (ie. the period of time the insured person must be unable to work before the benefits begin to be paid)?
- What the benefit period should be (ie. whether payments should continue for 2 years, 5 years, or through to the person’s age 65)?
- Whether the cover should be held within a person’s superannuation fund or in their own name?
There are other issues to consider also, but the above points provide a general outline of the most common considerations – and show the value of advice, and tailoring a solution to meet each client’s needs.
Income protection insurance is tax deductible to a person if held in their own name.
Trauma or Critical Illness Insurance - A more recent insurance development, trauma insurance pays out a lump sum upon the diagnosis of specific/named events – eg. cancer, heart attack, stroke, MS etc.
While the number of events covered varies from insurer to insurer, the number of conditions covered is typically around the 40 mark.
This cover is comparatively more expensive than life and TPD insurance, and it is not tax deductible. As such the level of trauma insurance cover recommended is usually less than other types of cover.
One strategy for the use of trauma insurance is to be able to supplement a person’s income protection insurance coverage (eg. income protection pays out 75% of pre-illness income; and a lump sum from trauma insurance can assist in providing a combined benefit closer to 100% of the person’s pre-illness income).
The usual parameters which are considered in assessing life insurance coverage include:
- Whether any debts exist?
- Whether there is one breadwinner in the family and if so, what income stream might that person have provided to the family over their working lives?
- Whether the family wishes to make any specific provision for children’s education costs?
- Whether there are any estate equalisation issues which need to be considered (eg. child 1 receiving the family business; and child 2 receiving a comparable amount of capital via a life insurance policy)?
- Whether the cover should be held in a person’s name, or within their superannuation fund?
There is no one-size-fits-all solution for calculating life insurance requirements – each client’s situation must be assessed on its merits.
Like all insurances, the earlier the cover is adopted, the less expensive the cover.
TPD Insurance - Total and permanent disablement insurance typically accompanies life insurance cover. In this situation a client is often unable to continue to work at all. As such, the level of cover is often similar to that of the life insurance cover which a person might take out.
Once again, when considering the level and structure of cover, an Adviser would typically turn to the questions above in the Life Insurance section.