Are your insurance needs covered?

The start of a new year is always a good time to check whether your insurance policies are still serving your needs. But this year there is even more reason to review your cover.

If your super balance is less than $6000 or you are under 25 and are a new fund member, life insurance in your superannuation will no longer be automatic come April.i

Letters have already been sent out to those affected by the change which is part of the Putting Members First/Protect Your Super Package legislation. If you don’t respond to the letter by advising your super fund that you want to maintain your cover, it will be cancelled.ii

Since last year, super accounts inactive for more than 16 months have been in a similar situation with automatic cancellation of life insurance if the member doesn’t opt in to continue their cover. There are a few exceptions, such as defined benefit funds, so contact your super fund if you’re unsure.

Of course, most Australians with super won’t be affected as their balances exceed $6,000 and they are aged over 25. Indeed, due to the existence of default life insurance offered through super, many more Australians have cover than in previous times.

Sometimes, however, this cover may be insufficient to cover your actual costs, should you need to make a claim.

Underinsurance still common

A 2017 survey by Rice Warner found the median death cover was only twice the median household income. Yet it’s estimated that people in their 30s with children would need replacement income equivalent to eight times their family income to continue their current lifestyle if one parent were to die.

Similarly, total and permanent disability (TPD) cover is generally only three times the median household income when four times is ideal. TPD pays you a benefit if you become seriously disabled and are unlikely to ever work again.

While life and TPD cover have grown thanks to super, only about 30 per cent of the working population has income protection insurance. Income protection pays you regular income for a specified period when you are unable to work due to temporary disability or illness.iii

Given the size of mortgages these days and the cost of raising a family, this low level of income protection cover is concerning.

You probably don’t think twice about insuring your car or your home, so why think twice about insuring your ability to earn an income should something unexpected happen?

Do regular check-ups

Insurance needs vary depending on your income, your age, your family situation and your working status.

Clearly if you have a young family and a mortgage, your financial commitments will be greater than if you have paid off your mortgage and your children have flown the nest.

That’s why it’s important to check your insurance when it comes up for renewal and/or when your personal circumstances change. For instance, if you have recently married, had a child or retired you may need to alter your level of protection.

Inside super or out?

For some, life insurance outside super may provide more tailored cover than insurance offered inside super, or you might decide to have a combination of the two.

Life insurance in super is often cheaper because super funds can negotiate group rates and your premiums are paid with pre-tax dollars. Generally, you will be covered without having to undergo a medical, but there are drawbacks.

Unlike insurance inside super, cover outside continues when you change jobs. And claims are likely to be faster as benefits are paid directly to the policy owner and not to the fund. Also, outside super, you can insure “own” occupation rather than “any” occupation with a TPD policy. This means you will get a payout if you can’t continue working in a similar occupation to your current one. “Any” occupation is a much broader definition and can lead to a lower chance of making a successful claim.

Life insurance is a must for most people, but it will be of limited use if you don’t have adequate cover should you make a claim.

i https://www.apra.gov.au/putting-members%E2%80%99-interests-first-%E2%80%93-frequently-asked-questions

ii https://www.sunsuper.com.au/employer-news/legislation-update-oct-19

iii https://www.ricewarner.com/life-insurance-adequacy/

Preparing for unknown future

Many people go through life believing serious illness or injury cannot happen to them.

But in reality, the chances of a trauma event are quite high. For instance, one in three Australian men and one in four Australian women will be diagnosed with cancer before they reach 75.

The Lifewise/NATSEM study shows that one in five families will be affected by a parent’s death, or a serious accident or illness that will leave one parent unable to work.

Not only the victim suffers when a critical illness occurs; such a situation has serious repercussions for the entire family. Thanks to advances in medical science, survival rates from a serious critical illness continue to increase, but the direct medical costs and associated financial impact can be significant.

Lump sum payment

Trauma insurance, also known as critical illness insurance, provides a one-off lump sum payment when an illness or condition specified in the policy is diagnosed.

The money, which is tax-free, is typically paid after the insured person has survived for 14 days from the time a medical specialist confirms the diagnosis. Once the claim has been approved, the lump sum payment is made and the funds can be used to pay medical costs, upgrade treatments or to pay for private nursing, therapy or childcare assistance.

Some people use the money to pay off their mortgage or other debts to help ease financial stress during their recovery. The lump sum payment can allow a person some much-needed financial breathing space to take stock of their life.

What is covered?

Most policies cover upwards of 50 prescribed illnesses or injuries, including cancer, heart attack, stroke and paraplegia as well as other serious illnesses and injuries such as major burns and kidney failure.

In contrast to trauma insurance, total and permanent disability (TPD) insurance requires you to be unable to work for a minimum of six months, and then it must be independently determined you are unable to 'permanently' return to your 'own' or 'any' occupation ever again.

Most trauma policies offer child cover alongside adult cover. While it may be difficult to consider one of your children being seriously ill or injured, sadly it can happen. A lump sum payment may allow parents to choose the best medical care inside or outside of Australia or give them the ability to take time off work to focus on family without worrying about the financial implications.

Know your policies

It is important not to confuse trauma insurance with income protection insurance. Instead of a lump sum, income protection insurance provides an income stream in the event you cannot work as a result of illness or injury. It provides an income while you are unable to work, replacing part of your wage or salary.

For complete financial protection, both a trauma policy and an income protection policy should be considered.

Susie's story

Taking out trauma insurance proved a wise decision for Susie and her husband, Paul. Susie was diagnosed with breast cancer when she was 43 with a young family. She had surgery and then needed time to recover and to have ongoing treatment.

Her husband Paul had plenty to worry about - Susie's illness, the children and his own work responsibilities. Fortunately Paul and Susie had each taken out trauma insurance, providing them with a $200,000 lump sum. With this money Paul could organise care for the children, ensure Susie received the best medical help available and take time off work to spend with his wife.

The Cancer Council estimates that a cancer diagnosis can on average cost a family more than $47,000 in lost productivity and out-of-pocket expenses.

Life can be full of unexpected events, both good and bad. Having the right insurance in place can reduce the financial consequences of a traumatic event.

We can help you determine whether your existing insurance cover will allow you to meet the challenges of an unknown future.

Financial rules to live by in 2019

Australia has enjoyed almost three decades of economic sunshine. But it’s worth remembering that dark clouds can appear without warning over both individuals and economies.

You may have little control over being caught up in a round of redundancies or experiencing the fallout of an international trade war. But you can choose to manage your finances in a way that lets you keep your head above water come what may.

Financial rule #1: Have an emergency fund

A recent NAB/Centre for Social Impact report found one in seven adult Australians had no savings. One in three were just two missed pay cheques away from serious financial stress.i

The advantages of a rainy-day fund are both practical and psychological. If you do suffer an unexpected setback, you’ll have a financial cushion to fall back on. Plus, knowing you have, say, three months’ worth of living expenses set aside will allow you to make unhurried, rational decisions. (There’s a growing body of research that shows financial stress causes people to behave in short-sighted ways likely to deepen their financial distress.)

Financial rule #2: Get the right insurance

Many Australians who wouldn’t dream of not insuring their home and vehicle are happy to hope for the best when it comes to their income. Surveys suggest only around a third of adult Australians have life insurance, income protection or TPD cover, and many of those are under-insured.ii

If you’re one of that majority of under-insured Australians you may wish to consider the wisdom of insuring your car (which could be replaced for a few thousand dollars) but not doing anything to ensure you – or your dependents, if you’re no longer around – can stay on top of mortgage payments and grocery bills should the income from your job or business disappear.

Financial rule #3: Be smart about debt

While lenders are beginning to tighten their home-lending criteria, there’s never been a time when credit has been so readily available. Technological advances mean this access is only going to become more ‘frictionless’ during 2019.

When it comes to debt, it’s important to understand the difference between the good, the bad and the ugly.

Good debt is used to create wealth, for example, borrowing to buy appreciating assets such as a house or investments. Then there’s acceptable debt, such as getting a car loan so you have the means to get to work. But credit cards, as well as increasingly popular buy-now-pay-later services such as Afterpay and ZipPay, and the short-term online loans offered typically facilitate bad debt, where high-interest credit is used to fund holidays, restaurant meals, clothes shopping and the like.

It’s unrealistic to expect you’ll never splurge using other people’s money but do try to keep it to a minimum, shop around for the best interest rate and repay what you owe as soon as possible.

Financial rule #4: Forge a positive economic partnership

Money issues can be a major cause of tension in relationships if left unspoken. By opening the lines of communication around money you will not only help build harmony but also make it easier to develop and reach shared goals.

You and your better half are unlikely to be at the same point on the saver-spender spectrum, so some conflict is inevitable. Nonetheless, it’s possible to engineer workable compromises around joint finances.

The ‘Yours/Mine/Ours’ method works well for many. It involves each partner getting a set amount of money to do whatever they wish with, allowing them to enjoy some autonomy. The trade-off is that both agree to direct the rest of their disposable income towards reaching mutually agreed goals. For example, paying off the mortgage within five years, making voluntary contributions to super or building a share portfolio.

i Financial Resilience in Australia 2016, NAB and Centre for Social Impact, p.9,https://www.nab.com.au/content/dam/nabrwd/documents/reports/financial/financial-resilience-report.pdf

ii Life Insurance – Are you underinsured? Canstar, Oct 2016, https://www.canstar.com.au/life-insurance/life-insurance-are-we-underinsured/; Underinsurance in Australia, Finder, https://www.finder.com.au/underinsurance-in-australia

Young invincibles – the importance of insurance

When you are young, healthy and just starting your working life the last thing on your mind is life insurance. In your 20s and 30s your financial focus is more likely to be on saving for a car, holidays, a home or the birth of a child. But failing to protect the lifestyle you are creating could have a devastating financial effect. 

Like many Australians young and old, it’s possible that you already have insurance cover in your superannuation fund without realising it. But that could be about to change. 

Under new legislation proposed with this year’s Budget, large numbers of super fund members are likely to lose their insurance cover. The legislation is still before the Senate but if the changes go ahead from July 1, 2019, those aged under 25 or with low super balances will be required to ‘opt-in’. 

When to consider insurance

The move to ‘opt-in’ insurance for young members has been generally welcomed, as some may have more insurance than they need at their age and stage of life. But there are concerns that a significant minority could be left underinsured. 

No matter how fit and healthy you are, accidents happen – on our roads, while playing sport or on the job. Insurance may be a necessity if you work in a hazardous occupation such as construction. Major illness and chronic health problems can also strike in your 20s and 30s. 

While Australians are marrying and establishing families later than previous generations, there are still plenty of people under 25 with a partner, and/or children, who would be financially disadvantaged if they were to die or be unable to work due to accident or illness. 

Even though Millennials may not have dependents yet, or the financial commitments their parents have, spending on rent, car loans, credit cards and daily expenses all require a steady income. 

So why the changes?

The Government’s Protecting Your Super package is designed to protect members’ savings from being eaten up by excess fees and insurance premiums. 

Most super funds currently make automatic deductions from members’ contributions to pay for life insurance. This is known as “opt-out”, as the onus is on members to cancel the insurance if they don’t want or need it. 

Typically, there are three types of insurance offered to members:

• Death Cover or Life Insurance – part of the benefit your beneficiaries receive when you die.

• Total and Permanent Disability (TPD) – pays you a benefit if you become seriously disabled and are unlikely to ever work again.

• Income Protection Insurance – pays you an income stream for a specified period if you can't work due to temporary disability or illness.

Under the new rules, funds will only offer insurance on an ‘opt-in’ basis for new members who are under 25 years old, members with balances below $6,000 or those who have an account that has been inactive for 13 months. 

Good news and bad

Despite the good intentions of the new rules, the bad news is that insurance premiums are likely to increase for most members who retain cover. This is because under the present system younger, healthier members cross-subsidise insurance claims by older members. 

According to Price Warner, premiums are likely to increase by about 11 per cent on average.i Premium rates will vary considerably from fund to fund, depending on the benefit design, demographics of the membership, and changes to terms and conditions to deal with switching cover on and off. 

The good news is that there is time to consider your options. Funds are required to notify members with low balance or inactive accounts and outline what steps they can take if they have insurance and want to continue their cover. 

i ‘Federal Budget average premium increases’, Rice Warner, 31 July 2018, http://www.ricewarner.com/federal-budget-average-premium-increases/?utm_source=Email+Campaign&utm_medium=email&utm_campaign=42575-53602-Insight_Federal+Budget+Average+Premium+Increases_31.7.18

Future proof your family

Life has a habit of throwing us curve balls. How else to explain that every day in Australia 18 families lose a working parent and a chunk of their future income. That’s a strong argument for protecting your loved ones with adequate life insurance. 

And it’s not just the main income earner’s life that needs insuring. If their partner dies, it is estimated that the family income will drop by half. Even if the partner who earns the lesser income is not working at all, the main income earner will have to find extra childcare and or/housekeeping help or perhaps work fewer hours, all of which would squeeze the household budget. 

How much cover?

The simplest way to work out how much cover you need is to subtract your current financial resources from your future expenses. And when you do so, remember that your debts don’t die with you. 

It’s not just your mortgage you need to take into account but also your credit card and any personal loans as well as your day-to-day living expenses. Actuaries Rice Warner believe you need 15 years’ income to be fully covered.i

Yet Rice Warner found that the median level of life insurance cover across the working age population only accounts for 61 per cent of basic life insurance needs and only 37 per cent of the amount needed to fully maintain the standard of living of remaining family members.i

Insurance within super

For most working Australians, a basic level of life insurance is available automatically through your super account. This can be useful if cash flow is an issue, as the money will come out of your superannuation contributions or balance. 

However, life insurance within super is often not enough to meet your needs. The industry average for benefits payable from super is about $70,000, nowhere near the amount needed to provide ongoing support and security for your family.ii And if a payout is made to a non-financial dependent, they will pay capital gains tax on amounts over $50,000. 

The solution could be to top up your cover in a retail product outside super. The major difference between the two products is the underwriting process. 

When you apply for a retail policy your risk is assessed via underwriting. By comparison, most policies within super are not underwritten and cover is automatically granted without any individual risk assessment. 

While at first glance automatic acceptance may seem attractive, it does make sense to have an underwritten policy where the insurer assesses your risk through a medical examination or questionnaire as the cover will be tailored to your individual needs. Interestingly, industry statistics show that 93 per cent of people who go through the underwriting process will be accepted at standard premium rates.iii

The younger, the better

If you think you are too young to worry about life insurance, think again. The younger you are, the cheaper it will be. That’s because you will be deemed low risk and once the policy is in place the insurer can’t cancel it. 

Next, you need to decide on stepped or level premiums. While stepped premiums start off cheaper, over time level premiums are more cost effective. If you are young and expect to hold the policy for a long time, level premiums are worth considering. 

It is estimated that a 35-year-old non-smoking male seeking $500,000 cover will pay $30 a month in premiums while a female with the same profile would pay only $25 a month.iii

It’s always wise to know exactly what your policy includes. Some policies will pay out before death if you are diagnosed with a terminal illness. Others may cover suicide although they generally have a 13-month exclusion from the date the cover starts.iv

Making sure you have the right cover for your needs is vital. If you would like to discuss your options please contact us. 
 

i http://ricewarner.com/australias-relentless-underinsurance-gap/ 
ii https://www.amp.com.au/wps/portal/au/ 
iii http://www.lifewise.org.au/insurance-101/how-does-life-insurance-work
iv http://www.lifeinsurancefinder.com.au/post/insurance-types/life-cover-death-benefit/suicide-is-it-covered-by-life-insurance/

Where there's a Will

Australians are living longer than ever before and accumulating more wealth in the process. Chances are you not only hope to enjoy your nest egg while you are alive but also to make sure that what remains when you die is distributed according to your wishes. To do that you need an estate plan with an up-to-date will. 

An estate plan involves making appropriate financial and legal arrangements to pass on everything you own when you die. This might include the family home, superannuation, life insurance, investments, a business and personal items. 
 

Dying intestate

Dying without a valid will means dying intestate and this can create unintended financial and emotional stress for your family. A will may be invalid if it is poorly drafted or the legal rules have not been followed. 

When this happens, debts are paid from the assets in your estate and the remainder is distributed according to a pre-determined formula. As a result, some people may receive more or less than you intended and your estate could be eaten away by unnecessary taxes and legal costs. 

It is estimated that as many as 60 per cent of people die intestate and, of the 40 per cent who do have a will, many aren’t sure where it is located, or whether it is validi. 

Just like a financial plan, a will needs to be reviewed and updated when your circumstances change, such as with the birth of a child or a divorce. It needs to be signed and witnessed in the correct way and kept in a safe place. 

It is a good idea to leave a copy of your will with your solicitor or the executor of your estate so the family are not forced to search the house for it when you die. 
 

A helping hand

The best way to make sure all your affairs are in order is to establish an estate plan with the help of a solicitor. A will is a good starting point, but it should not end there. 

Now that we are living longer it is increasingly necessary to have measures in place in case we become mentally or physically unable to cope. 

Giving a trusted relative or friend an enduring power of attorney gives them legal authority to look after your financial affairs. 

A medical enduring power of attorney authorises a person to make healthcare decisions for you if you no longer have the capacity to do so. An enduring power of guardianship authorises someone to make personal and lifestyle decisions for you if you become mentally incompetent. 
 

Superannuation and Insurance

You also need to take estate planning into account when you invest because issues such as tax and ownership structure can have far-reaching effects beyond the grave. For example, many people are not aware that superannuation and life insurance (whether held inside super or outside) are not covered by a will. 

Your financial adviser can work collaboratively with your solicitor to ensure that all your assets are distributed to the people you nominate in the most tax efficient manner. 

In the case of superannuation, it may be possible to make a binding death benefit nomination. This allows you to leave your superannuation to the people you have nominated, including your estate. Where it is paid to your estate it will then be distributed according to your will. 

The best way of ensuring your all your assets are preserved and end up in the hands of the people you love most is to seek help from a trusted professional. Not only is this the legally and financially wise thing to do, it is a final act of kindness to your family at what can be a very stressful time. 

i. www.thewillregistry.com.au

An insurance lifeline when you need it most

Trauma insurance is the middle child of the personal insurance family. It’s overshadowed by its better-known siblings but it’s a quiet achiever that will do the heavy lifting when the circumstances require it.

What trauma insurance is and isn’t

Trauma insurance – sometimes known as critical illness insurance – provides a lump sum payment in the event of a major illness or injury, such as a cancer diagnosis, heart attack or stroke. The full list of conditions covered will be set out in your policy.

In 2013, the most recent year for which figures are available, insurers paid out $621 million to 4512 trauma policyholders. That works out to an average pay out of $137,808.i

As with other types of personal insurance, the cost of a trauma policy will vary depending on how likely you are to make a claim. This is calculated with reference to your age, gender, occupation, health status and the amount of cover you’re seeking. A non-smoking 35-year-old male, for example, should be able to take out a standard trauma policy for around $300 a year. This will entitle him to $20,000 if he has a heart attack, $120,000 if he’s diagnosed with cancer and $150,000 if he has a stroke.ii

Why you may need it

You may be wondering why you might need a trauma insurance policy if you have private health insurance. If you have other forms of personal insurance that provide a much larger payout if something goes wrong, you may wonder why you need to bother with trauma cover?

The answer to the first question is that trauma cover pays for rehabilitation, carers, other forms of treatment and loss of income that health insurance does not. The answer to the second question is that trauma is best seen as a complement to, rather than substitute for, these other forms of personal insurance:

• Life insurance pays your dependants a lump sum if you die.


• Income protection insurance replaces (most of) your salary for the period you are unable to work due to illness or injury.


• Total and permanent disability (TPD) insurance provides you with a lump sum payment if you suffer an injury or illness that prevents you ever working again.

If you don’t have any personal insurance, you would be well-advised to investigate some of the more well-known policies before considering trauma cover.

A small outlay for a lot of peace of mind

If you have superannuation you almost certainly have some life insurance, TPD cover and possibly even income-protection cover ‘baked in’, although the amount of cover is often low so you may need to buy a separate policy outside super. Trauma cover can only be purchased outside super, which brings us back to the issue of why bother.

Take the 35-year-old who is paying $300 a year for trauma insurance. Let’s say he’s diagnosed with cancer. He has a life insurance policy but it’s not going to pay out anything unless it’s terminal cancer. He’s got TPD insurance but it’s not going to pay out anything unless the cancer is going to result in a total and permanent disability. He’s got income-protection insurance but that’s only going to pay out, after a waiting period, once proof has been provided that the cancer is preventing him from earning an income.

With trauma insurance, there are no ifs or buts. Once the diagnosis is made, he qualifies for a lump sum of $120,000. That’s not going to set him up for life by any means, but it will allow him to cover medical expenses and pay the mortgage if he needs to, or chooses to, stop working for a while to concentrate on getting well.

If, like our hypothetical 35-year-old, you have financial responsibilities and want the reassurance of a payout if you suffer an insurable health-related setback then trauma insurance may be for you.

Avoiding being under or over insured is no simple task. If you’d like us to help you work out your insurance needs, give us a call.

i Industry Stats 2013, the risk store 2014, http://www.theriskstore.com.au/resources/16/TRS_Claims_Stats_2013.pdf

ii What’s the cost of trauma insurance, finder.com.au 2017, https://www.finder.com.au/cost-of-trauma-insurance

Three insurance myths exposed

In the unlikely event that you break a leg or, heaven forbid, die prematurely you and your family have got it covered, right? You’ve got life insurance care of your super fund, not to mention that pricey health insurance policy. And if worst comes to worst, there’s always a government pension to fall back on, isn’t there?

Actually, most Australians don’t have nearly enough insurance. The nation’s underinsurance gap has been estimated at a whopping 1.8 trillion dollars.i Part of the reason for that is the trio of misconceptions outlined above.

Let’s go through them one by one.
 

Myth one:
My super will cover me

The reality is that the overwhelming majority of people that have insurance attached to their super are underinsured. One in two super fund members has less than half the life insurance cover they need. Nearly three quarters are underinsured for total and permanent disability cover.ii

Here’s another sobering statistic: Rice Warner found a couple in their mid-thirties with young children would need at least $680,000 worth of life insurance cover. The default super fund cover was just $200,000 – less than a third of what’s required.

Super policies typically don’t automatically include income protection or total and permanent disability (TPD) cover. While it’s true that many super funds will allow you to purchase these types of insurance, often at an attractive price, you’ll almost always have to contact your fund to put special arrangements in place. What’s more, trauma insurance is not available inside super.

If you haven’t already, you should read over your super policy carefully or contact us to determine exactly what kind of insurance is being provided. You’ll likely find the money your super fund would pay out in the event of a calamity is far less than you imagine.
 

Myth two:
My private health insurance will cover me

Private health insurance is a wise investment, but even at the highest level of cover it won’t even cover the full amount of your medical bills. And it certainly won’t pay the mortgage or other everyday living costs such as utilities, groceries or school fees.

Granted, there are moves afoot to allow private health funds to provide more comprehensive cover, possibly eliminating costs such as gap fees. But, by definition, health funds will only ever cover health costs and only until a set monetary or time limit is reached.
 

Myth three:
The government will look after me

The Australian government does provide a range of payments to support people if illness or disability leaves them unable to work. But unless you lead an extremely modest lifestyle, trying to survive on a pension is an enormous challenge. The Disability Support Pension currently provides $867 a fortnight if you’re single and over 21, or $653.50 a fortnight for each member of a couple.

That translates to $433.50 a week for a single person, or about 65 per cent of the minimum wage. Interestingly, the government also estimates the average person under 35 spends $869 a week on living expenses – which provides some idea just how tough it is trying to make ends meet on a disability pension.
 

The truth will set you financially free

In a worst case scenario you or your family would be unlucky to be left entirely on your own to cope. Your super and health funds, the government and possibly even friends, family and charitable organisations might provide some assistance.

But wouldn’t you prefer to know that in the event of a serious health challenge you have the right level of insurance cover? That you and your family wouldn’t need to worry about financial issues on top of everything else?

If so, call us to discuss whether your current level of insurance is appropriate to your situation.

i ‘Underinsurance in Australia’, Rice Warner, July 2015

ii www.lifewise.org.au