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.

Running for cover

How much life insurance is enough?

Australians enjoy access to a strong safety net, with universal healthcare and the new Disability Support Scheme. But will this be enough to protect your family’s standard of living if you or your partner die or become too ill to work? The answer is almost certainly no.

Life insurance is designed to bridge the financial gap in difficult times. Yet even those of us who do have life insurance often don’t have enough.

Not so super

First, the good news though. If you’re a member of a super fund you probably have life insurance, total and permanent disability (TPD) insurance and possibly income protection insurance. Trauma cover can only be purchased outside super.

Super funds are able to negotiate group rates so insurance premiums are often lower. Premiums are deducted from your super account balance, not your bank account, which also helps when your budget is tight.

The not so good news is that the payout in the event of a successful claim is typically limited. According to a recent report by Rice Warner the typical default cover offered inside super meets only about 30 per cent of the basic life insurance needs of a family with children.

As a general rule of thumb, Rice Warner estimates that a couple with children needs life insurance cover of 10-15 times the higher earning partner’s annual income to ensure the family can maintain its standard of living if the main breadwinner passes away.

Given the average full-time job in Australia pays $78,000, that translates to a payout of $780,000 - $1,170,000. Yet the payout from life insurance held inside super is generally closer to $100,000 - $200,000.i

So how much cover do I need?

Of course, individual circumstances vary. A twenty year old without dependents requires a lower level of cover than a middle-aged parent with a $400,000 mortgage.

We can assist you to work out how much life insurance you and your family may need. Essentially, it comes down to subtracting your debts from your assets then determining how much money will be required to cover the ongoing outgoings. Think home loan payments, school fees, groceries, utilities, vehicle expenses and so on.

For example, if it’s going to take a decade for your children to be self-sufficient and your current annual household outgoings amount to $80,000, you should aim for at least $800,000 of cover.

His and hers policies

If it’s unusual in Australia for the main income earner in a family to have adequate life insurance, it’s downright rare for the parent working part-time or not at all to have it. That person typically provides unpaid labour in the form of childcare, cleaning, shopping and meal preparation.

If the low or no-earning partner is no longer around or incapacitated in some way, their partner will most likely either have to take on those added responsibilities or pay someone to do so. So it’s worth making sure both parents have adequate cover.

Purchasing peace of mind

It’s human nature not to want to dwell on worst-case scenarios. Nonetheless, it’s unfortunately all too common for people in the prime of their lives to pass away or suffer an illness or injury that prevents them from earning an income.

There’s nothing you can do to guarantee that won’t happen to you or your partner. But there is something you can do to make sure you or your loved ones won’t experience financial distress if misfortune strikes.

So start by investigating how much and what type of life insurance your super fund currently provides. If you find that it falls short of your needs, you might consider topping it up by purchasing additional cover outside super.

If you would like some help working out how much insurance you and your family need, and what type of policies best suit your circumstances, give us a call.

i http://canstar.com.au/superannuation/life-insurance/