Weighing up the value of life insurance

It probably comes as no surprise to anyone that there is a significant underinsurance gap between what we would need to maintain our standard of living should the unthinkable happen, and what we are actually covered for in the way of insurance. 

Australia is one of the most underinsured nations in the developed world, ranking 16th for life insurance coverage.i

There are lots of reasons people give for not buying life insurance, but top of the list is invariably cost. Sounds reasonable enough, especially when households are under pressure from increasing costs of living. But dig a little deeper and it turns out the way we weigh up decisions when outcomes are uncertain is not always in our best interests. 

According to something called ‘Prospect Theory’, people fear a certain loss more than they value a larger but uncertain gain. We tend to view money spent on insurance premiums as a loss, unlike money spent on a daily cup of coffee, a pair of shoes or a weekend away, which deliver immediate rewards. 

There’s also a disconnect between what we say we value and what we spend our money on. 

Thinking about the unthinkable

When asked, most people say the thing they value most is family. Yet when it comes to insurance many of us cover our car and our home but overlook our most important assets - our life, our ability to earn an income and the wellbeing of the people who depend on us. 

Thinking about being diagnosed with a terminal disease, suffering a disabling accident or contemplating your own death or that of your partner is uncomfortable. Seeking cover for those possible eventualities is something that is very easy to put off or avoid altogether. 

The real value of life insurance is the peace of mind, that if we die or become seriously ill and are unable to work then the right amount of money will go to the right people when they need it most. 

Types of life insurance

There are different types of life insurance. Death cover provides a lump sum if you die or are diagnosed with a terminal illness. Total and permanent disability (TPD) pays a lump sum if you are permanently disabled due to an accident or illness and unable to work again. Trauma Insurance (critical illness insurance) pays a lump sum on the diagnosis of one of a list of specific illnesses such as a heart attack, cancer or a stroke. Income protection provides a monthly payment if you can’t work due to illness or injury. 

The amount of life insurance you need depends on your family circumstances, your income and lifestyle. While many working Australians have default cover in their super fund, that’s no cause for complacency. It’s often a basic level of cover, which may need to be topped up outside super. 

Take Chris, aged 30. He has a partner, two children and the median level of default life insurance cover in super for someone his age. That is, $211,000 in death cover, $162,500 for TPD and $2,250 a month for income protection. According to a recent report by Rice Warner, the amount someone in Chris’s position needs is closer to $704,000 of death cover, $910,000 of TPD cover and $4,150 a month of income protection.ii

Paying life insurance premiums won’t provide the instant pleasure hit of an espresso, but most people would be surprised to know that the peace of mind that comes from protecting their family’s financial security costs less than their daily cup of coffee. 

Rice Warner estimates the cost of death cover and TPD cover for the average working Australian at less than 1 per cent of salary, and less than 0.5 per cent for white collar workers.iii Which begs the question, what cost do you put on the wellbeing of the people you love most? 

If you would like us to help you work out the appropriate level of life insurance for your family, and the best way to achieve it, give us a call. 
 

i Swiss Re Economic Research & Consulting, 2007
ii Underinsurance in Australia 2017, Rice Warner. 
iii www.ricewarner.com/rice-warners-affordability-study-how-affordable-is-group-insurance-in-superannuation/

Life insurance inside or outside super?

If you’ve got super, chances are you’ll have some default insurance included and the option to buy more at an attractive price. It’s a cost effective way to get a basic level of cover, but holding insurance inside super does have some downsides.
 

Forms of super insurance

There are three types of insurance you can hold inside super: life, total and permanent disability (TPD) and income protection insurance. Many super funds automatically insure their members and will provide a (relatively small) payout if, for example, they die or suffer a debilitating accident. But the level of default cover is likely to fall short of your needs.

Canstar found that while young families typically need around $680,000 of life cover, the average default life policy is only $200,000.

Nevertheless, you can pay a little extra to top up your insurance through your super fund if you want more cover. There are three big advantages to doing this:

• These policies are relatively inexpensive because super funds can buy in bulk and pass on the discount they receive to members;
   
• These policies are easily accessed. You’ll typically have your application for insurance approved without having to be examined by a doctor or provide detailed medical information;
   
• You pay for cover from your pre-tax income because the cost of premiums is taken out of the super contribution your employer deposits in your fund.
   

What’s the catch?

Some life insurance is better than none, but there are downsides of a one-size-fits-all solution. Super funds get bulk-buying discounts on the basis that they purchase standardised ‘off the shelf’ policies. Such a policy may or may not be suited to your individual needs.

Automatic default cover also means younger, healthy members are subsidising older and less healthy members. And while paying for insurance out of your super contributions can help your cash flow, it’s money that’s being diverted from your retirement nest egg.

You also need to keep in mind that insurance taken out through your super isn’t portable; if you switch to another super fund that insurance will cease. Payouts can take a while because the insurer pays the super fund, which then pays the claimant.

If you fail to make a binding beneficiary nomination, or your super fund doesn’t offer binding nominations, the super trustee will decide who gets your benefits if you die. That beneficiary may be taxed more heavily than would be the case with a retail policy. And finally, the insurance ends when you retire.
 

Going outside

Getting insurance outside of super can be a little more expensive and time-consuming but it’s worth considering for a number of reasons.

• You’ll have access to a wider range of policies. That means you can find one that’s more tailored to your individual needs.
   
• You can’t get trauma insurance through super, but you can in a retail policy.
   
• Payouts tend to be faster and you’ll have more capacity to ensure a death benefit goes to the beneficiary you want it to.
   
• If you’re in good shape, your premiums will reflect this.
   
• While you’ll be using your after-tax income to pay for it, income-protection insurance is tax deductible.

Another issue with income-protection policies through super is that they are linked to your current income. This may be unusually low when you make a claim due to, for example, having gone part-time to look after children. In contrast, retail income protection policies can offer a guaranteed benefit.
 

SMSFs and insurance

It’s not just big public super funds that can provide insurance cover. If you have your own self-managed super fund (SMSF) you’re legally obliged to consider the insurance needs of members when drafting your fund’s investment strategy. Life, TPD and income protection insurance can all be purchased through an SMSF but it won’t have access to the discounts large funds enjoy. Plus, you generally need to undergo a medical examination before receiving cover, so there are few advantages of holding insurance inside your SMSF.

If you would like to discuss the best insurance solution for your family’s needs, please give us a call.

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

Honesty the best policy with life insurance

Life insurance is one of the most important investments you can make to protect your family’s future wellbeing. And like any investment, it needs careful consideration.

Taking out too little or too much insurance can be costly. Failing to disclose all relevant information to an insurer could result in a claim being denied – possibly after years of paying premiums – just when you need help most.

Negotiating in good faith

Heartbreaking stories about insurance companies failing to pay out when a policyholder suffers an illness or injury get plenty of media attention. What’s often glossed over in these reports is that the company is within its legal rights to deny the claim.

There are several reasons a claim can legitimately be denied: unpaid premiums; exclusion periods or clauses; or a medical condition not being severe enough to qualify for a payout. But non-disclosure is the most easily avoidable reason for claims being denied.

An insurance policy is a contract, which means both parties are required to enter into it in good faith. That means you have to respond truthfully when your insurer asks you specific questions. You also need to volunteer any information, such as pre-existing health conditions, that would be relevant in deciding whether to insure you.

The good news is that most claims are paid out in full. That noted, one of the first things an insurer will do on receiving any claim, particularly a life insurance claim that’s likely to involve a substantial pay out, is double check the policyholder didn’t misrepresent their circumstances when taking out the policy.

Getting assistance

Non-disclosure issues are one reason it pays to choose a retail product rather than a direct life insurance policy. As the name suggests, a direct insurance policy is sold as a one-size-fits-all direct to the consumer, rather than through an adviser. It’s easy to apply for online or over the phone, with little or no medical information required.

With a retail policy, an expert adviser will walk you through the application process, taking care to ensure you don’t inadvertently fail to disclose any relevant information. It may be a little more expensive but it can save you money in the long run. An Australian Securities and Investments Commission (ASIC) report found average declined claim rates were highest for non-advised policies (12 per cent), compared to 7 per cent for retail policies.” i

There are other reasons direct insurance policies can offer false economy. These include a basic level of cover with few extra benefits and a wide-ranging clause stating ‘claims due to pre-existing conditions are not valid’.

As life changes, so should your insurance

Another issue to be aware of is that your insurance needs will vary at different life stages. So it’s sensible to get into the habit of reviewing your insurance cover annually or, at the very least, whenever major life events, such as the following, occur.

• You welcome or farewell a child
  Kids are expensive, something to consider when calculating the income your partner would require should the worst happen. Alternatively, if your children have reached the age where they are independent, you may be able to scale back your policy and premiums.
   
• You welcome or farewell a partner
  As your relationship status changes, so might your main beneficiary and the amount you wish them to receive.
   
• Your income or debt levels fluctuate
  That payout of $80,000 a year, which seemed sufficient when you had the lifestyle of a young middle manager, might not be so livable when you’re a fifty something executive. On the other hand, once you own your home and your partner will not be left with the burden of a mortgage you may be able to reduce your cover.

The right insurance solution for you and your family will be as unique as you are. If you would like to discuss your insurance needs, don’t hesitate to give us a call.

i ASIC REP 498 ‘Life Insurance Claims: An Industry Review’, 12 October 2016

Have your kids got it covered?

Just because your children are adults, with good jobs and maybe even married with children of their own, it doesn’t mean they shouldn’t be considered in your retirement plans.

Family is a risk that many don’t consider when planning for retirement. After all, you probably have little or no debt now the kids are independent and you are retired or close to retirement. Hopefully you feel you have enough money saved to live the retirement lifestyle you looked forward to as you worked to raise your family.

However, unforeseen circumstances and emergencies can impact wealth. What if something were to happen to one of your adult children and they are not sufficiently insured, then who are they going to call? In most cases, it’s you. Few parents would turn their backs on their children in a crisis.

Protecting loved ones

Let’s say the unexpected were to happen and your son-in-law passed away tragically in his late 30s, leaving behind your daughter and two small children. If he had insufficient life insurance, your daughter could find herself struggling to pay the bills on her own.

Most likely you would step up to the plate to offer financial help, or invite your daughter to move back home with her children. All of a sudden, your travel and retirement plans are on the back burner and your well-earned nest egg may start to erode.

In contrast, if your son-in-law had made sure he had sufficient insurance cover, it would be a different story. Of course, you would still need to deal with the emotional trauma of your daughter becoming a young widow, but at least you would know she had sufficient funds to support her family.

Start a conversation

It makes sense to have a conversation with your children to make sure they are adequately covered. You are not only looking out for them but also ensuring that your life plans stay on track, given that it is a time when it would be difficult for you to recover financially.

Life insurance, total and permanent disability, income protection and trauma cover are all insurances about which your children should consider seeking professional advice. For many, life and TPD insurance can be bought through super although it’s important to make sure it provides sufficient cover to meet expenses such as funeral costs, mortgage/rental payments, education, groceries, and recreation.

If your children are concerned about the cost of premiums, you might consider sharing the cost with them.

Even if your children have not yet started a family – perhaps they are still living at home in their 20s – a similar situation might arise. For instance, if they were to face a serious illness or a permanent injury, who would pay the medical bills? If they can no longer earn, the money has to come from somewhere.

Look after their health

It’s not just life insurance you need to consider. Health insurance is also important for your adult children. Many health funds no longer cover children as part of the family premium once they reach a certain age.

Generally speaking, they will be covered up to age 25 while they are a full-time student. If not, their cover may cut out from age 18. Yet if they are injured, private cover may be necessary to get speedy access to treatment and it may be left to you to foot the bill.

If your independent child is under 25 you may be able to pay an additional premium to include them on your family private health insurance. This might be cheaper than them taking out their own private health cover.

Protect your retirement

It’s easy to say you don’t need life insurance once your debts are under control and to an extent this might be true. But your children may still be at the stage of life when they need full protection.

Make a time to chat to them about what cover they have and whether they think it is enough for their needs. If they are unsure, speak to us as we can assess their requirements and provide them with guidance.

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/