Life Insurance and Personal Financial Risk

Jacqueline Hodges

Many people ignore their personal financial risk and the insurance they need to protect their lifestyle. Many say “I’m too busy to worry about this”, “I’m fit and healthy”, “I’m only young” or “I don’t need life insurance, I don’t have anyone to leave it to”. But the trust is, we all need to think about our life insurances. It’s a process of personal financial risk management, like carrying an umbrella is its cloudy outside.

What I find is many of my clients, don’t actually understand life insurance is actually an umbrella term. Life Insurance is a general term for a range of personal insurances, including:

• Life insurance,

• Total and Permanent Disability Insurance,

• Recovery Insurance, and

• Income Protection Insurance

Getting the right life insurance is an important decision. But choosing the right life insurance is difficult as each insurer offers different features and your circumstances change through the life stages.

Some of the important factors to consider when choosing your life insurance include:

• The type of life insurance and the level of cover

• Your health and lifestyle and whether any special conditions apply

• The sum insured or amount of benefit your insurer will have to pay out

• The price of your premiums, can you afford the monthly or annual premiums

• Your occupation, a dangerous occupation may increase the premium

• Your age, older people face much higher premiums, the younger you are when you commence generally reduces the premium

Life insurances are there to provide you and your family with financial security if you passed away or something unexpected happens to your body or mind. They are used to protect your quality of life and the future you’ve planned for yourself and for your loved ones. Which Insurance do you need

Each type of life insurance protects you in a different way. The first thing to consider is, which types of insurance you need to help you live the life you’ve planned. The following summaries give a brief explanation of each type of life insurance.

Life Insurance

Life insurance is also known as ‘life cover’, ‘term life insurance’ and ‘death cover’. Life Insurance provides for your family and loved ones if you pass away, or if you are diagnosed with a terminal illness. It provides your loved ones with a lump sum payment that can help ensure their financial security. You can choose to be covered for accidents, illness and even adventure sports.

A life insurance payment may allow your family to retain the family home, provide for your children’s education, and allow your partner to continue living the life you had planned together.

Recovery insurance

Recovery insurance is also known as ‘trauma insurance and ‘critical illness cover. Each insurer is different but generally recovery insurance covers critical injury, critical illness and cancer. It provides a lump sum payment if you become critically ill, or injured and require extensive medical treatment to recover.

The lump sum payment provides you with the financial freedom to reduce your work hours, access medical treatment, and pay for your rehabilitation you need.

Total and Permanent Disability Insurance

Total and Permanent Disability Insurance (TPD) provides a lump sum payment if you become totally and permanently disabled because of an accident or illness and are no longer able to work. Each insurer has a different definition of what it means to be totally and permanently disabled. It can cover you for either your own occupation or any occupation.

When deciding if you need TPD insurance, and how much you need, work out the expenses you will need to cover if you were permanently disabled and unable to work. These might include:

• living expenses for you and your family • renovations to your home or car • repaying debts such as a mortgage or credit card • medical and rehabilitation costs • savings you want for retirement

Your own occupation Any occupation You are unable to work again You are unable to ever work again in the job you were working in in any job suited to your educabefore your disability. tion, training or experience. This cover is more expensive This cover is cheaper but has a and is usually only available higher threshold to claim, so it’s outside super less likely to pay out

Income protection insurance

Income protection insurance provides an alternative source of income and is usually paid monthly. It is to help replace a portion of your income if you are unable to work due to serious illness or injury that has left you totally or partially disabled. It covers accident, illness and sports injuries.

The monthly payment will continue for a nominated time and will help you keep your household up and running, and provide for your loved ones while you recover.

When to review your Life Insurance

You should review your insurances regularly and if a major change or life event happens in your life, such as getting married or having a baby. Some future life events are:

• You get married or divorced • You or your spouse become a parent through birth or adoption • You take out or increase a mortgage on your home

• Your child starts secondary school • Your children leave home

• You are preparing to retire Your financial adviser can help you work out if the insurance you have is appropriate and sufficient for your needs.

How Life Insurances Work

Life insurance can be bought separately or bundled into one policy. You may require one or more of these types of cover, depending on your circumstances.

Life insurance can also be purchased inside your superannuation or outside your superannuation.

How much Insurance

do you need?

How long is a piece of string? Determining how much insurance you need is difficult to measure and will depend upon your personal circumstances. Your financial adviser will consider many factors including, your age, your living expenses, your relationship status, your lifestyle and your likely future needs.

To begin understanding how much you need your adviser will ask you to work out the cost of your lifestyle. If you have children they will work out how much is needed to cover their future education and living costs. Here are some examples for Fixed, Flexible and Monthly/Quarterly/Annual expenses: • Fixed expenses, include rent, mortgage repayments, car loans and phone/internet plans • Flexible expenses: food, clothing, entertainment, medical and additional mortgage payments • Monthly expenses: mortgage repayments, phone, electricity and private health insurance • Quarterly expenses: rates and water charges • Annual expenses: insurance and car registration Depending on your life stage, some insurances are best owned by you outside of your superannuation. The cost of maintaining your life insurance outside of superannuation may add to your personal expenses and seem costly but in the end its about managing your personal risk and having an umbrella to protect you financially.

Disclaimer: The information contained in this article is general in nature and may not be relevant to your personal circumstance and needs. Taxation, legal and other matters referred to in this article are of a general nature only and are based on laws existing at the time and should not be relied upon in place of appropriate professional advice.

We recommend that you assess whether the information is appropriate to your needs and if appropriate speak with a financial adviser to discuss your needs, financial situation and investment objectives.

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