Steps to insuring against life's downturns
Article Category: Demographics
By Anthony Keane, 5 May, 2008, 5 May 2008
PERSONAL insurance can seem daunting to think about, with strange words, mountains of paperwork, medical tests and probing personal questions all conspiring to deter people.
However, ignoring these insurances is potentially the biggest financial mistake anyone can make. It is pointless trying to build wealth if there are no safeguards to protect it if something goes wrong.
Life insurance
This is the most common type of personal insurance and pays a specified lump sum when the insured person dies.
Its aim is to help surviving family members meet mortgage payments, other debts and living expenses such as food, childcare, education and clothing.
Life insurance can be held within superannuation or outside of super.
It is generally cheaper within super but may not be as flexible and there are potential penalties when death benefits are paid to people who are not dependants.
The costs vary depending on the age and health of the insured. PKF partner Tony Simmons says life insurance is the least expensive of all personal risk insurances and policy costs varied.
A healthy 40-year-old male might expect to pay $53 a month for $500,000 of life insurance cover.
Income protection
This is often viewed as the second-most important form of personal insurance after life cover.
William Buck financial services adviser Janine Williamson says it generally replaced up to 75 per cent of a person's gross monthly income in the case of illness and injury.
She says the typical household requires 35.2 per cent of its income to pay off the average home loan.
"The line between a comfortable lifestyle and financial distress becomes very thin when you add this to other debts and the escalating cost of raising children.''
Ms Williamson says a decent level of income protection insurance could cost about $1 a day and premiums are tax-deductible.
TPD insurance
Total and permanent disability cover is often linked in with life insurance in a policy, and provides a lump sum to the person if they become totally disabled.
There can be quirky definitions of "totally and permanently disabled'' among insurers, so it pays to read the fine print.
For example, with many policies someone who loses an arm would not qualify for insurance, but if they lost an arm and a leg, or two legs, they would qualify.
Some financial planners suggest people hold life cover within super but TPD cover outside of super.
ANZ financial planner Jacquie McCarthy says this is because most retail policies pay out if the person is unable to work in their own occupation, but many super policies only pay out if the insured is disabled for "any'' occupation.
Trauma insurance
This type of cover is known by several names, including living insurance and critical illness insurance.
It pays a lump sum when someone suffers a trauma condition covered in the insurance contract, such as cancer, a heart attack or stroke.
"Trauma insurance is designed to help get people back on their feet after suffering a major health incident, but one that doesn't necessarily cause the person to be totally and permanently disabled,'' Mr Borg says.
How much is enough?
When working out how much life insurance you require, it is a good idea to have money to pay for:
* Funeral costs
* Your mortgage
* Education costs
* Debts, such as credit cards, personal loans, car loans and investment loans
* A lump sum to provide your replacement income to cover household costs
* Childcare costs, or an equivalent wage if the surviving spouse stays home with the children
* Smokers be warned. You are likely to pay double premiums on some forms of personal insurance cover because of your higher risk of illness and death