Step 3: Managing Risk

Hitting An Insurance Home Run

Most people either cringe or yawn when the word insurance is mentioned but regardless of whether you find it scary or boring, managing risk is a necessity in the world in which we now live. Let’s cover all of the bases to help make your home run as easy as possible.

First Base – Income Protection

Considering that over 530,000 people in Australia suffered a work-related injury or illness in 2013/14¹, what would your future look like if suddenly you were unable to work?

For most of us, the ability to earn an income is our most valuable asset. Depending on your age, your future income may well be worth far more than a house and its contents, a couple of cars, a boat or caravan all combined. Yet few people properly insure their income, and if illness or injury prevents them from working, financial hardship often results. With around half of us likely to spend more than three months off work due to ill health during our working lives, Income Protection insurance should be the first item on the personal insurance list.

Income Protection or Salary Continuance insurance can pay you a regular amount, usually up to 75% of your normal income if you are unable to work due to illness or injury. Benefits are taxable, and commence after a waiting period. Payments continue to be made until you return to work or until the benefit period expires. The waiting period and the benefit period are selected at the time of application.

Second Base – Life & Permanent Disability

Life Insurance pays a lump sum benefit if the policyholder dies. But what happens if they don’t die and can never return to work in their chosen occupation? Total and Permanent Disability (TPD) insurance can help ease the financial burden caused by loss of income by providing a lump sum
payment.

Most people underestimate the level of life insurance they need. The insured sum should be enough to clear net debt, cover future expenses such as school fees, and provide an adequate replacement for the income that the deceased would have earned through to their normal retirement age. For a breadwinner with young children, an appropriate amount may be well in excess of $1 million. This cover is also important for primary care givers to ensure the children are properly cared for.

Third Base – Trauma Cover

Financial security for you is a goal worth working for. But a sudden, life-threatening illness or major accident could undermine your hard work, draining your financial resources and badly affecting the quality of your life. Trauma Insurance fills a gap between Income Protection, Life and TPD Insurance.

South African heart surgeon, Dr Marius Barnard, pioneered the idea of this “living insurance” after witnessing his patients’ recoveries being hampered by their concerns over the financial burden caused by major illness².

Trauma Insurance pays a lump sum benefit on the occurrence of a specified condition such as cancer, heart attack or stroke, which can strike at any age. It often provides a benefit when neither Income Protection nor TPD Insurance claims can be made.

Unlike Income Protection, where the benefit is paid if you are unable to work regardless of the nature of the illness, trauma payments are based upon the specific illness, not the degree of disability.

It is designed to cover out-of-pocket medical expenses and other costs associated with major illness, and to allow recovery to take place without financial worry. In Dr Barnard’s words: “this means that you can obtain a benefit, not because you will die, but because you will live”.

Home Base – General Insurance

Most people insure their house and contents, motor vehicles and other possessions. The key here is to make sure that all possessions are covered for full replacement value. Insurance companies provide guides on their websites to determine an appropriate level of cover. Don’t forget valuables like jewellery, antiques or artwork, which often have to be separately noted in the cover. We can analyse your insurance needs and recommend cover that’s right for you and your budget. After all, you don’t want to strike out before reaching first base.

A Super Way To Insure

Most superannuation funds (and all industry funds) offer Life and Permanent Disability Insurance. There are a number of advantages in holding life
insurance inside your super fund.

Super funds can often negotiate wholesale insurance rates, so premiums for their life insurance are often lower than can otherwise be obtained as an individual. In addition, premiums are paid from your superannuation balance. Whilst this reduces your ultimate retirement benefit, the relative effect is usually small, and by relieving the strain on the household budget, you may be able to increase your overall savings. The main advantage of insurance held in super is that the premiums are tax-deductible to the fund, which ultimately reduces your cost of insurance.

When you join a superannuation fund you may be offered a minimum level of insurance. This is rarely enough to provide adequate cover and it’s up to you to request an appropriate level. Depending on your age, medical history and the level of cover you require, you may also need to
undergo a medical examination.

When leaving a superannuation fund you should find out what happens to your insurance cover. You may be offered a “continuation option”, which is an ongoing policy provided by the insurance company. If you don’t take this up within the period that the offer  covers, you may find yourself without insurance. If this happens, and if there has been a change in your health, it may be difficult and cost much more to obtain replacement cover in the future.

Insurance is a complex area. Policies vary in their detail and insurance companies differ in their approach to processing both applications and claims.  Each type of insurance has a role to play and it is a job for an experienced professional to work out the right amount of each type for you. You should also seek expert advice whenever you consider allowing a policy to lapse to ensure you are fully aware of the potential consequences.

We can analyse your insurance and recommend cover that is right for you and your budget. After all you don’t want to strike out before reaching first base.

Important Information  Wallis-Smith Financial Services Pty Ltd ACN 112 623 613 t/a Wallis-Smith Financial Planning, Sam Wallis-Smith & Victoria Wallis-Smith are authorised representatives of GWM Adviser Services Ltd ABN 96 002 071 749 an Australian Financial Services Licensee with its registered office at 105/153 Miller Street, North Sydney NSW 2060.

This publication consists of general and factual information only. Its contents cannot be substituted for professional financial advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.  Before you invest in any financial product you should obtain, read and understand the related Product Disclosure Statement and determine if it is suitable for your personal situation.  The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way.

Opinions in this document constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.