Life matters: Supersizing your insurance options

When it comes to your personal financial planning or money journey, you're not alone if you're focused on wealth accumulation.

Equally important, but too often neglected, are the strategies you can apply to protect the plan that has been put in place and you are working hard to achieve.  

Protection can mean a variety of things and apply to a range of circumstances. What would it mean for your family if you were not around or if you were too unwell to work? Does that pose a real threat

For those of working age, the ability to earn and provide an income is likely to be integral to the long-term plan. The absence of that – by way of accident, illness, or death – is in most cases a critical threat to long-term financial security. Naturally, these kinds of scenarios are not something we enjoy contemplating. The financial impact of many of these events can, however, be protected against with effective personal insurance cover.

Our typically Australian ‘she'll be right' and ‘it won't happen to me' attitude might be part of the reason why personal risk cover is often put to the side. There's other reasons too that many Australians find themselves in a state of chronic underinsurance.

“I have insurance in my super”

A key misconception is that you have sufficient insurance cover through your superannuation fund.

People often gloss over important superannuation statements to incorrectly assume that adequate insurance cover is included. Many super funds will issue members with some cover (for example death, and total and permanent disability) often referred to as ‘default' cover.

But if it is cover which you don't remember specifically applying for or increasing, there is a high chance it won't be sufficient. While default cover levels have increased in recent years, they are not matched to your very specific needs and circumstances. These cover levels are what the fund insurer can offer without medical questioning or underwriting. The first step is to check with your super fund provider and find out what cover you have, if any, and to what degree.

Underinsuring life

Life insurance, which is a lump sum payable on death, can sometimes be taken out in the amount of one's outstanding mortgage. This enables the surviving partner and family to remain in the family home without, for example, the pressure of meeting repayments on a sole income, or having to sell the asset. Covering any outstanding debt is an important consideration, but life insurance can go further than that.

The appropriate amount of cover depends on the individual and consideration should be given to the dependants' specific needs beyond housing. Costs of living, education and other items should also be factored in. It may be important to ensure there is a sufficient additional lump sum – over and above that needed for debt repayment – that can be drawn upon or used to create an income stream.

Overlooking disability

It is understandably difficult to adequately assess what a major disability could mean in a financial sense; the unfortunate reality is that it can place massive financial strain on a family.

Adequate care can potentially run up tens of thousands of dollars a year, factoring in home care, assistance with household duties, rehabilitation and home modification. A partner taking on a carer role may also be impacted financially. Again, talking to an insurance specialist or financial adviser can put realistic numbers into the equation to create real peace of mind.

Looking broader

Different types of policies cover for different events. For example, trauma insurance, which is sometimes referred to as ‘critical illness' cover, provides a lump sum if you are diagnosed with a specified illness or injury without imposing a waiting period. This differs to the application of income protection cover or total and permanent disability cover.

Like anything, you need to understand the options and bear in mind the associated costs. Not everyone will require the entire suite of offerings, but often a combination of policies is sufficient in covering your personal risk factors and ensuring you have the best chance at being financially supported when you need it the most.

Considering costs

Costs will vary depending on the individual, and to demonstrate this on a simplified basis, we can consider the monthly premiums of two different people. A 35-year-old male, non-smoker applying for $500,000 of life cover is likely to pay a monthly premium of approximately $30, while a 35-year-old female, non-smoker applying for the same $500,000 of life cover is likely to pay a $25 monthly premium.

Premium costs should be considered and budgeted for, but the overall cost could be more affordable than you may initially think. Furthermore, it might be viable to attach some insurances to your superannuation fund; which means that premiums can be funded from your superannuation account balance, alleviating stretch on your personal cash flow.  

Like all money matters, insurance cover should be reviewed from time to time and as family and personal circumstances change. Understanding and managing the range of options and estimating the right amount of cover can be a daunting and exhausting exercise, so engaging an insurance specialist or financial planner who thoroughly understands your position and needs can be most beneficial.

Carol Tawfik is a certified financial planner.