Here is the complete series of our Personal Insurance Mini series where we cover over the four main types of personal insurance.
First we have Life insurance, this covers you on your death or Terminal Illness when given 12 (or 24 months) left to live (as certified by a doctor).
Life insurance is useful for covering debts that you don’t want to leave your family, such as your mortgage, or car repayments. If you don’t own a house you could even insure yourself for enough money to purchase a house so you can move your family out of the rental trap.
Another use is to replace your income for your family now you are no longer around, this is especially important if you are the main income earner in the household and your family was reliant on your ability to produce an income. When looking at replacing your income there are a few important factors to consider:
- How will my families cost of living increase over the years, and how long would they need supporting?
- What sort of return on the money will they receive, and how would they invest it?
- What tax considerations need to be considered on my family receiving the income?
If you would like help working out how much cover you and your family needs and how best to structure it, please book in for a complimentary meeting.
Next we have Total and Permanent Disability insurance (TPD), this the most complicated of cover and it is solely due to it’s definition.
Totally and permanently disabled and unlikely/unable to work in any/own occupation that you are suitably trained or experienced in.
When holding TPD inside superannuation the premiums are tax deductible to the superfund compared to holding it personally where it is not tax deductible. However this also means that on successful claim the TPD held inside super will carry a taxable component on withdrawal compared to being held personally.
If you are not employed you may end up having to satisfy a different definition which is the Activities of daily living which is basically a test against five common tasks performed on a daily basis, such as cleaning, cooking and grocery shopping. As you could imagine, meeting this condition could be quite difficult to meet.
With TPD cover it is important that the cover amount covers any outstanding debts, money to cover rehabilitation and any potential care. It is important to note that you can still receive your income protection benefit when you have successfully claimed on TPD, which will reduce the over all insurance coverage amount. (however some companies are adding clauses that cancels IP on successful TPD claim to prevent long term claims. At the time of writing this applied to REST and Hostplus)
Next we have Income Protection, this cover pays you a monthly income up to 75% of your income if you are unable to work temporarily due to injury or illness.
It is very useful to hold if you only have a small amount of annual or sick pay, and would not be able to afford having an extended period of time off work.
Cover can start as quickly as 14 days from the incident (and some offering 4 days if due to an accident which could be useful for self employed people), up to 2 years wait, and benefit periods from 2 years all the way to age 70.
Due to IPs ease of claim likelihood it is one of the more expensive types of cover, however if you were to think about how valuable your ability to produce an income is, it is a small price to pay.
There is no real difference in regards to tax treatment inside vs outside super, as inside super is tax deductible to the fund (and contributing to super is tax deductible to you) and outside super it is tax deductible directly to you. One of the key differences is the added benefit (auxiliary) you get outside super vs inside. This is because Superannuation rules (SIS act) only allows for temporary payment, whereas outside super you can have accommodation, rehabilitation and specific injury benefits as well making your total claim value greater than the 75% of income. (click here to learn about the upcoming changes to IP)
The last type of cover we are looking at is Trauma insurance (also called Critical Illness).
Trauma insurance covers you for specific medical conditions such as heart attack, cancer and stroke. Over the years of offering this cover most insurers now conform to medical conditions covered which is roughly 40.
Trauma insurance is fairly straight forward as you either meet a medical condition or you don’t so claim time isn’t usually an issue, but it is important to remember what you can claim on.
One of the most common claims we see is for Melanomas, as once removed and has met a certain size criteria (usually 1.5mm and Clarke level 4) the policy definition has been met, and depending on the type of policy you would receive a full or partial payout.
Trauma insurance cannot be held inside superannuation as it doesn’t meet SIS act definitions and its premiums are not tax deductible however the payout received is also not taxable.
On successful claim the cover ends, however you are able to reinstate the cover after 12 months, and it will cover you for all the definitions except those that you have claimed on (or are related to the claim).
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