What insurance do I need?

Lately we have been talking about savings and ensuring you have enough in the event you were unable to work… for many people that time came this year due to Covid-19.

So in hindsight we needed to have 6 months of savings but the reality is most of us don’t right now and the importance of savings and personal insurance have proven to be an integral part of our financial plan. With that said, how do you know how much to insure yourself or what insurance products you need?

To be honest there is no straight answer to that question, and I do recommend you seek advice from a qualified adviser…. however below are some tips and things to consider.

For the purpose of this article I am not going to discuss how your insurance should be structured nor discuss ownership of your policies.

Please note this information is general in nature and not to intended nor to be treated as advice.

Life insurance

Do I need it? And if so how much do I need?

There are a few different ways to calculate how much you need as cover for life insurance. Some advisers calculate your cost of living over a period + CPI. This calculation can also be done on your salary as well and some experts suggest you cover yourself for at least 10 to 12 times your salary – this way you will be leaving enough funds for your loved ones to cover the cost of living.

Consider the cost of raising children if you have children. What are their school fees? Do you want to leave them a lump sum?

Now when calculating these amounts you may find that the number is incredibly high and the cost of this insurance would be too expensive – what can you do about this? If you have a partner who shares the mortgage with you perhaps you both just cover yourselves with what you owe.

Also consider when in life you may be able to “self-insure” – meaning you will have enough capital/assets to leave behind. At this point you will want to reduce the amount you have insured or even cancel your cover.

I don’t want to over complicate things, however if you have a lump sum calculated on your cost of living (which included your mortgage repayments) and (for the purpose of this example) this money is $1,000,000 which at your death is to be invested so that your loved ones were to receive an income stream from this investment of $70,000 per year, then it is imperative you also have an estate plan so that your wishes can be fulfilled.

In many cases life insurance companies offer a TPD rider (this is total and permanent disability cover) that is linked to your life insurance. This is a simple way of covering yourself if your were to survive an illness or accident that has left you totally an permanently disabled, and in some cases the sum insured for life would be needed for TPD. A rider means that if you claim the total sum insured of life for TPD then this will wipe out your total life cover. Getting TPD cover this way can be a very cost effective way to insure yourself.

Income Protection

Do I need it? If so how much and how long for? And what about workers compensation?

When it comes to income protection, to me, it’s a no brainer – of course you need it. If you drive a car you insure it, and here in Australia we also have compulsory 3rd party insurance to be able to even drive our cars so when it comes to our biggest asset – the ability to work and earn an income why wouldn’t you insure yourself?

Let me put it to you like this: If you earn a gross figure of $75000 per year and you were age 35 and then the unthinkable happened and you had an illness that prevented you from working for the rest of your working life this would be a financial loss of $2,250,000 (in today’s dollars) calculated to age 65. If you were driving a 2.25 million dollar car would you insure it? Hell yeah! I think I have made my point on the question of “Do I need it?”.

But wait, there is more to this…. Not everyone can get income protection due to their occupation or perhaps can only get a 2 year benefit or a 5 year benefit.

If you have a savings safety net, accrued long service leave and or sick leave you may be able to extend your wait period from 30 days up to 2 years – please review this often as your situation may change and you do not want to be in a situation where you are waiting months on end for a claim to be paid because you have an extended wait period.

Workers compensation only works for a short period of time. It is also only payable if you injure yourself at work. There are far more claim cases that don’t involve work, so relying solely on workers compensation as a financial safety net is a gamble.

There is also Critical illness cover, otherwise known as trauma cover.

You may think, why do I get that when I have income protection? The cost of cancer treatment can be extraordinary and not all medication is offered by PBS and there are still out of pocket gaps when it comes to your costs and the private health rebates. Also, you may actually be able to work part time but your partner may take time off to help you through your treatment or you choose alternate therapies… all this can be covered with the critical illness cover.

How much would I need? I tend to look at 2 years of your gross salary as a place to start. This type of life insurance is known as living insurance, it covers you for events you will most likely recover from but at the time will have a massive impact on you.

I hope this article gives you some guide on what to consider when getting personal insurance. I do recommend you seek advice. If you do go direct to an insurance company be sure to get medically and financially underwritten prior to the policy going in force, otherwise you may have a challenge on your hands at claim time. Again, why getting advice is far more valuable as an adviser will also assist you with the underwriting process as well as the claims process.