Personal insurance provides money when you can't, for your care as well as the financial needs of your beneficiaries. It can: pay off debt — mortgage, car, credit cards, and personal loans; or pay ongoing costs — daily living needs including food, clothing, power, as well as education, health care and lifestyle maintenance.
Earning an income is one of your greatest assets. You probably insure your car and home, why wouldn't you insure your ability to provide for the future?
Income protection also called salary continuance, provides a taxable monthly benefit if you are temporarily unable to work due to disability or illness.
Trauma (T) cover also called critical illness or recovery money, provides a lump sum if certain health events happen including malignant cancer, heart attack or stroke.
Your own circumstances dictate what's needed so everyone's is different. Seeking professional advice is highly recommended.
Here are some useful but very general ideas you could think about.
Rule of thumb for age groups:
A 40 year old earning $40,000 pa (increasing 5% each year) will earn around $1.9 million by age 65. Generally, you can insure for 75% of your work income.
Affords you the choice of better quality medical care and treatment. E.g. non-pharmaceutical benefit medicines (expensive drugs) and minimises the financial pressure of the recovery.
Many insurance companies and super funds have self-help, online calculators that can give you an indication of the level and types of insurance you need to think about.
Many of us have some sort of insurance cover in our super account.
Some benefits of having your insurance in super includes:
Having life insurance inside your super can be tax effective, cost effective and cash flow friendly. Accessibility to and taxation of TPD benefits in super can be restrictive.
Unlike life insurance and trauma, income protection is generally tax deductible when held outside of super. Benefits and features can often be superior. Your personal circumstances will dictate what's best for you.
Trauma cover is generally not available in super and is not tax deductible.
Chris has a well-paid job and is keen to properly insure, maximise super savings and reduce tax.
Chris has some life insurance and IP with a two year benefit period which was provided automatically through the employer super fund. It's not enough to provide long term for partner Taylor and to pay off debts in case of an unforeseen tragedy.
With some help, Chris decides to increase the D&TPD cover in super as the rates are cheaper and far more tax effective.
IP with a two year waiting period and a benefit period to age 65 is taken outside of super to complement the IP in super. The cost of this is tax deductible.
Chris salary sacrifices up to the maximum contribution level of $25,000 p.a. Chris now has the level of life insurance needed, at discounted and tax effective rates and also has a lower taxable income thanks to the salary sacrifice and IP outside of super.
Taylor also needs insurance cover but doesn't earn nearly as much as Chris.
Chris decides to boost Taylor's super by using the contribution splitting strategy to transfer some of last year's contributions to Taylor's account. Because Taylor also qualifies for the maximum government co-contribution they contribute a further $1,000 personally to the account which will be matched by $500 from the government.
In effect, Taylor's insurance cost is largely or completely paid for by Chris's tax effective salary sacrifice and the government co-contribution.
As one size doesn't fit all, and with so many different levels of cover to compare, choosing the right insurance can be a challenge. This is where we can help.
At Gallagher, we gather and sift through information to find the most suitable personal insurance options for you. So if death, illness or injury were to affect one of the building blocks of your wellbeing, you can rest assured the right money will go to the right people when they need it most.
The information and any advice in this article does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. When considering whether to acquire a financial product, before making any decision, you should obtain the relevant product disclosure statement.
This article may contain material provided by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. To the maximum extent permitted by law: no guarantee, representation or warranty is given that the information or advice in this newsletter is complete, accurate, up-to-date or fit for any purpose.
