Personal risk insurances provide a financial benefit in the event of you suffering a serious injury or illness, or death. They include term life insurance, total & permanent disablement insurance, income protection insurance, and trauma insurance.
What is life insurance?
Term life insurance pays a lump sum on the death of the insured, or if the life insured is diagnosed with a terminal illness and has usually less than 12 months to live.
How much term life insurance do you need?
A recent survey by Rice Walker Actuaries found that only 4 out of every 100 Australians have adequate life insurance. And that 60% of families would be in financial distress just one year after the bread winner died.
What is income protection insurance?
This insurance is designed to replace yourincome if you are unable to work due tosickness or injury. It provides a monthlypayment of usually up to 75% of yourpre-tax income.
You can generally choose the waiting period(this is how long you must be unable to workbefore the insurance begins to pay you) andthe benefit period (how long the policy willpay you if you are unable to work).
Importantly, the premiums for incomeprotection insurance are usually taxdeductible. The cost of this insurance variesbased on the waiting period, the benefitperiod, your income and occupation.
How much income protection do you need?
Most people will earn a fortune between now and when they retire. And yet many people fail to insure their most important asset –their ability to earn an income. This is despite statistics which show that:
- Every working Australian has a one in three chance of becoming disabled for more than 3 months before reaching age 65.
- More than half of all serious accidents happen outside of work – when workers’compensation generally doesn’t apply.
As a general rule of thumb, you and your spouse should insure the maximum of 75%of your pre-tax income, up to age 65. The waiting period can be extended until after your sick leave and long service leave etc will be exhausted.
Some people have basic income protection insurance through their employer. But this insurance generally pays a benefit for a maximum period of only two years and is a basic type of cover.
This means if you are unable to return towork after two years you may not have asource of income. In some instances it may beappropriate to take an additional policy with abenefit period up to age 65.
What is trauma insurance?
Trauma insurance pays you a lump sum on the diagnosis of a specified non-pre-existing illness or injury, generally including heart attack, stroke, cancer, and paraplegia. This can be taken as a stand alone policy, or attached to a life insurance policy.
This insurance was created when it wasrealised that medical advances were resultingin patients increasingly surviving majorhealth problems, but that the financial costof survival was prohibitively high for patients(e.g. medical costs, medicine, time off work,rehabilitation etc). In other words, patientsdidn’t lose their lives… they lost their lifesavings instead.
How much trauma insurance do you need?
The chances of suffering a trauma are,unfortunately, quite high. For example:
- For a 45 year old, the risk of having a stroke before 85 is 1 in 4 for men and 1 in 5 for women
- It is expected that 1 in 3 men and 1 in 4 women will be diagnosed with a cancer before age 75
- For a 40 year old, the risk of coronary heart disease at some time in the future is 1 in 2 for men and 1 in 3 for women.
You should consider purchasing enoughtrauma insurance to cover you and yourspouse for:
- Meeting medical, pharmaceutical and rehabilitation costs not covered by your health fund
- Paying for a carer
- Funding modifications to your home that may be necessary due to permanent disability (e.g. replacing stairs with ramps)
- Repaying debt
- Topping up your Income Protection policy payments
- Paying for extended time off work (so you can fully recover before you return to work).
It’s not just the breadwinner who needs risk insurance
Families typically insure the breadwinner,but many do not insure the home-maker.However if the home-maker dies and is not insured, the breadwinner and their children could be left financially vulnerable. Could the breadwinner afford to take extended time off work or take a less demanding but lower paying job so they could look after the children? Or could the breadwinner afford to hire a carer to look after the children?
If the home-maker suffers a trauma and is not insured, could the breadwinner afford to pay all the medical and rehabilitation costs?And take extended time off work so they could look after the spouse? Or could the breadwinner afford to hire a carer for the spouse?