Following on from my previous post about getting started Investing, I thought I would elaborate more on why you need insurance and how insurance cover inside your super fund can work.
Insurance is a classic case of something you don’t think you need until you really need it.
Most people are natural optimists (it helps deal with the ups and downs of life nowadays), so thinking about what might go wrong isn’t always at the front of your mind. Fortunately, financial planners are taught to also look on the pessimistic side – this helps us compare the risks and potential rewards of any given situation.
Firstly I’ll cover off some insurance basics (these work with insurance inside or outside of super) and then I’ll deal with some of the pros and cons of having cover inside your super fund.
What If?
The general issue we have is that most people insure their house and car, but forget about insuring their life or their ability to earn an income. This is because it is easy to visualise what happens if your car or house is damaged and it is easy to estimate the cost of its loss.
It is much harder to imagine the impact of an unexpected injury or illness. The fact is that up until your mid 40’s, your biggest asset is usually your ability to continue to work. This asset can be impaired or lost through illness or injury. Not only do you have to take care of your medical expenses, your normal day-to-day costs are still the same. What happens when your sick leave runs out?
Here are a couple of scenarios to get you thinking:
- You break your leg skiing: A great trip to the snow, messed up by an unlucky fall and six to eight weeks in a cast. While in the cast, you can’t continue to do your job.
- A car accident: You are rear-ended in traffic. You have a severe back pain and find it impossible to continue working. How do you cope?
- Diagnosis of a severe illness: it turns out that those flu-like symptoms aren’t the flu. The doctor tells you they have some bad news. What next?
What would happen, are you covered? The things to consider in these circumstances are:
- How do I pay the medical bills?
- can I keep making my loan/car/mortgage repayments as normal?
- How do I afford to keep living?
- Do I have enough savings to cover my expenses for 1/3/5 months?
- If I’m injured, who does the cleaning/washing/looking after the kids?
If you are unsure about any of these issues, you need to look at your insurance cover.
Types of Insurance Cover
Personal Insurance can be split into two basic categories:
Insurance That Pays You a Lump Sum:
- Life Insurance – a lump sum paid to your estate upon your death, or diagnosis of a terminal illness. This sum covers your debts with additional amounts left to your beneficiaries.
- Total & Permanent Disability Insurance – A lump sum paid if you are permanently disabled by illness or injury, meaning that you can never work again. The payment helps with funds for your living expenses, medical bills, debt reduction and to make any modifications to your home.
- Trauma Insurance – This pays you a lump sum upon suffering a major trauma (like heart attack or stroke) or being diagnosed with a major illness (like cancer). The cover helps you to pay medical bills, reduce debt and to cover short term living expenses.
Insurance That Pays You a Regular Income:
- Income Protection Insurance – Cover for when you are unable to work or produce the same income as a result of illness or injury. This insurance pays a regular amount to cover what you normally would have earnt while working.
Getting the right mix of these insurances is the trick. Too much and you are paying more than you need in premiums, too little and you are not covered when you need it most.
Basic Cover is Cheap When You are Young
The cost of the premiums for any insurance is linked to the likelihood that you will claim. While you are young and healthy, the premiums for basic insurance cover are generally quite affordable.
For example, a healthy 30 year old male would pay around $100 per month for $1,000,000 of Life and Disability cover. This pays out a lump sum of $1 million if you die or are permanently disabled.
To have comprehensive cover (which is recommended) may be more expensive, which is where the option of having cover in your superannuation fund can be a good alternative.
Cover in Super
While basic cover can be cheap, the cost of comprehensive insurance cover might be prohibitive. Rather than not have enough insurance (or any at all), my preference is to hold some of the cover within your superannuation fund.
That way, you are still protected, but do not have to pay all of the premiums personally.
(As a note, Trauma cover is not available inside super – it can only ever be held in your own name).
It does not matter which super fund you use, they all must offer some form of insurance cover. Prices can differ a lot between funds though, so it pays to research your options.
The savings come from the fact that some or all of your insurance premiums are funded by your ongoing superannuation contributions, rather than out of your day-to-day budget.
The superannuation fund can claim tax deduction (at 15%) for the Life and TPD premiums payable, something that is not normally available to you personally. Income protection premiums are tax deductible to both inside super (at 15%) and outside of super (at your marginal tax rate).
There are a number of important things to consider about insurance inside a superannuation fund:
Potential Tax Payable: Life & TPD insurance payouts from a superannuation fund may incur additional taxes, whereas personal insurance payments are always tax-free. Any additional tax paid will depend upon who receives the death benefits. If your most likely beneficiary is your spouse (or young children) the payments are most likely to be tax-free. If the payments are made to adult children, additional taxes can be incurred (at 17.5% on a portion of the total payment).
Disability Cover is limited inside super: TPD cover inside superannuation is limited to a stricter definition of disablement. TO access this payment inside super, you must be assessed as unable to do ‘ANY’ occupation for which you have training. TPD outside super can be held as ‘OWN’ occupation, where you must be assessed as being unable to perform your current job.
Issues with Income Protection cover: Income protection cover inside super is limited to a plain vanilla policy (no ancillary benefits).
Where to now?
If you are interested in learning more about how you can get the best (and hopefully cheapest) insurance cover, contact us for a FREE one hour consultation.
We’ll work with you to establish what insurance cover you may need and then come up with a plan to get you that cover at the best price possible.
If you’d like to know more about how we can help you, simply contact our office to arrange a complimentary initial consultation on 07 5494 0650.