Personal insurance explained
by luke kidd
Introduction:
When it comes to safeguarding your financial future, personal insurance plays a crucial role. In Australia, there are several types of personal insurance available to help protect you and your loved ones from unexpected events. These include life insurance, total permanent disability (TPD) insurance, income protection and trauma insurance. Understanding the difference between these insurances, and how they can be tailored to meet our client’s individual needs is a complex matter that we deal with on a regular basis. This article will outline some of the important things to know about personal insurances when developing a personal protection strategy.
Life insurance:
When does it pay?
Life insurance, also known as "term life insurance" or "death cover," pays out a lump sum to your estate or beneficiaries in the event of your death. Additionally, some life insurance policies may include a terminal illness benefit, which means the policy will pay out if you are diagnosed with a terminal illness and generally have less than 12 months to live.
What can it be used for?
Having a lump sum payable upon death is most often used to ensure your dependants can be financially secure if you pass away. This might mean paying out the mortgage on the family home, providing cash to pay for your funeral or providing capital that can be used to generate income for your surviving family members over the longer term.
How much do I need?
Everyone’s needs and circumstances are unique. Your super fund might automatically provide you with a default level of life insurance, however it’s important to make sure this will be enough to satisfy your goals in the event you pass away. Some of the things to consider when calculating your life insurance needs include:
Do you have any outstanding debts?
How much additional income would your family need?
What costs would your family need to cover in the future? For example, school fees, vehicle replacement, household renovations.
Total Permanent Disability insurance (TPD):
When does it pay?
TPD insurance pays out a lump sum if you become totally and permanently disabled due to illness or injury. TPD policies can have different definitions of what it means to be totally and permanently disabled, and a successful claim will often require an assessment from multiple medical experts. The more common reasons for claiming include accidental injury, mental health conditions, physical disablement and cancer. (1)
What can it be used for?
A major challenge for people being unable to work is no longer having a salary to meet cost of living needs. A lump sum TPD benefit can be used to replace this income via a regular income stream or investment distributions. TPD polices are often used to pay down major debts such as a mortgage to secure the family home and ease cost of living pressures over the long term. Additional funds may also be needed to fund medical, rehabilitation and accessibility costs or to make major renovations or modifications to the family home to make living more comfortable.
How much do I need?
Everyone’s needs and circumstances are unique. Your super fund might provide a default level of TPD insurance for you automatically however it’s important to make sure this will be enough to satisfy your goals in the event were unable to work. Some of the things to consider when calculating your TPD insurance needs include:
Do you have any outstanding debts?
How much income would you need to fund your cost of living?
What contingency funds would you need for things like medical costs or household renovations?
Income protection:
When does it pay?
Income protection, also known as salary continuance, is designed to replace your earned income if you are unable to work for a temporary period due to accident or illness. This is different from TPD cover which only pays for permanent disablement. Different income protection policies will have different definitions for what qualifies as temporary disablement, generally they will cover conditions that require ongoing medical care and will be subject to waiting periods, benefit periods and payment limits.
What can it be used for?
Put simply, income protection is used to replace your lost earnings and can be used to pay for your day-to-day household expenses. Income protection can include long-term benefit periods and can be used as a compliment to TPD and reduce the level of lump sum required.
How much do I need?
Income protection policies are limited to pay only a proportion of your income, often between 50% - 75% of your pre-tax earnings. Some policies will also include an additional amount to replace your employer’s super contributions. Income protection policies will have a waiting period which is the amount of time that must elapse before any benefits are paid, often 30 to 90days and sometimes multiple years. Income protection policies will also have a benefit period which determines how long your replacement income is paid for, often 2 years, 5 years or to age 65. Everyone’s needs and circumstances are unique, but the benefit amount, waiting period and benefit periods will determine how much value you could potentially gain from an income protection policy.
Trauma insurance:
When does it pay?
Trauma insurance, also known as critical illness insurance, pays out a lump sum if you are diagnosed with a serious illness or injury that is specified in your policy. The more common claim conditions include cancer, heart attack and stroke (1) but most policies will cover a wide range of serious medical conditions.
What can it be used for?
Even if you have private health insurance or access to the public health system, you can still face significant out-of-pocket costs when recovering from a serious health event. This can include gap payments for surgery, specialists, medication, medical equipment and transportation costs. Having a lump sum payment from a trauma insurance policy can help meet these immediate needs. A trauma benefit can also be used to provide flexibility for you or your partner to take time off work, and focus on making a full and fast recovery. Families can also consider protecting childhood illnesses under a child trauma policy should they face this unfortunate circumstance.
How much do I need?
It can be hard to quantify how much of a contingency fund you might need for healthcare costs. However, research provided by Zurich estimates that serious illnesses can cost tens of thousands of dollars over the course of recovery (2). You might also consider what kind of additional flexibility you and your family would need to have peace of mind. As with all kinds of personal insurance, you should consider your own financial circumstances and goals.
Insurance within your super?
All of these types of insurance can be purchased directly through insurance providers. Additionally, Life, TPD and Income Protection can be held within your superannuation fund. An advantage of this approach is that insurance premiums are deducted from your super balance, rather than charged to you directly. While this might make it easier for you to afford the level of cover you need, remember that it will also affect the long-term growth of your retirement savings. One way to counteract this is to make contributions to super to fund your insurance premiums; such contributions may also be tax deductible.
There are different tax considerations for Life and TPD insurance held in super, whereas personally owned policies are generally tax-free. TPD and Income Protection policies held in super also have more limited definitions than personally owned policies, as the conditions for paying benefits are constrained by superannuation law. When selecting where to hold your insurance policy, it’s important to ensure the relevant features are appropriate for your needs.
Conclusion
There are many other concepts and issues to consider when developing a personal insurance strategy that are not covered in this article. Premium structures, cash flow management, policy ownership, superannuation rules, family and estate planning are just a few of the important factors that inform a comprehensive risk management plan. Working with an expert financial planner will ensure that your insurance strategy is appropriate for you and your family’s needs both now and for the long term. Contact us today if you have any questions about your insurance arrangements and how we can help.
References
Talrealitycheck.com.au. (2023). Reality Checker. [online] Available at: https://talrealitycheck.com.au/ [Accessed 27 Feb. 2025].
Zurich.com.au. (2024). Zurich releases Cost of Care report on health conditions in Australia - Zurich Australia. [online] Available at: https://www.zurich.com.au/latest-news/media-releases/2024/zurich-releases-cost-of-care-report-on-health-conditions-in-australia.html [Accessed 27 Feb. 2025].
Luke Kidd in an authorised representative of Alliance Wealth Pty Ltd. (AR: 001242685)