Figure out the cost of death cover

Income-protection insurance is vital in order cope with periods of illness, writes George Cochrane.

Income-protection insurance is vital in order cope with periods of illness, writes George Cochrane.

I AM 49 and have had cancer with a 40 per cent to 50 per cent chance I won't be alive in 15 years. I work full-time, earning $69,000 a year. My financial plan had been to finish my second degree so I could work part-time into my retirement, pay off my HECS and make substantial super contributions. Given stringent rules around access to super benefits even for the terminally ill, my super will remain inaccessible, so I'm reluctant to contribute. Thus I need to accrue easily accessible money to live off should I have a recurrence. I am not eligible for Centrelink payments due to my partner's income. However, my partner's financial commitments elsewhere means there is no money left to support me. I have: $50,000 in PSS $20,000 in FSS with a $75,000 death and disability benefit $35,000 in HESTA with an income protection provision of $850 a month and $2000 in Health Super with a $457,000 disability and death benefit. I have $50,000 in a deposit, $15,000 in the bank and aim to save $25,000 a year. My HECS debt is $17,000. How do I provide for the future? D.P.

Maximise the salary continuance insurance options in your super funds as this may be sold without individual health checks. You are entitled to combined income-protection benefits totalling 75 per cent of previous salary before the life companies cut back on any benefits claimed. See if you can increase your income-protection benefits, across all your super funds, to about $4000 a month.

You are correct that a lump sum paid from "total and permanent disability" policies within your super funds is only payable in the event of terminal illness. If that stage is ever reached, you should have been able to claim on salary continuance long beforehand.

Claims made on death cover within super can be insanely complicated, although if paid to a de facto spouse or other "tax dependant", then it is tax-free. Don't forget that a former spouse can also have a claim on your super, as can children, so if there are any problematic family members, be sure to place binding death-benefit nominations either in favour of your estate or your partner.

Where a super fund member, who holds life insurance through super, dies, the resulting lump-sum death benefit may consist of (1) a tax-free component plus (2a) a taxable component (taxed element) and/or (2b) a taxable component (untaxed element). In simple terms, the latter represents the period until your future retirement, usually age 65, so the younger the person is, the greater the untaxed element. If not paid to a dependant, for example, a spouse or child under 18, then component (2a) is taxed at 16.5 per cent and (2b) at 31.5 per cent, applying to the entire super benefit, not just the insurance payout. It's a governmental rip-off. You could benefit from talking to a professional life agent.

By all means keep an amount outside of super, but balance your options by salary sacrificing, say, $20,000 a year into super. You can also get a tax deduction by buying income-replacement cover outside of super, if it is available. With regards to your HECS/HELP debt, note that if a person dies, any compulsory repayment will be payable until death but the remainder is cancelled.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW 2026. Helplines: Banking Ombudsman, 1300 780 808 pensions, 13 23 00.

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