Are you underinsured? The typical Aussie family is
How much are you worth? Are you underinsured?
If you suffer an injury or illness that leaves you permanently disabled, how will you or your family cope financially?
Will you be able to meet your mortgage payments, children's school fees, outstanding debt such as credit cards and just your everyday living expenses?
According to wealth management research company Rice Warner, the typical middle-income Australian family with two children is underinsured.
Currently, the median level of life insurance for a family stands at $258,000. However Rice Warner suggests $680,000 is the amount of life insurance required.
Money asks Dante De Gori from the Financial Planning Association of Australia (FPA) and Richard Dunkerley from Zurich some frequently asked questions about life insurance that will hopefully prompt you to revisit your policies in order to make sure you have the appropriate coverage.
How important is it to have the right coverage and why?
When it comes to life insurance, sadly, a large proportion of Australians are underinsured.
As a nation, we insure our material possessions with careful consideration, but overlook the importance of protecting the financial security of loved ones.In our recent research report with Zurich Financial Services, we identified a high level of 'mis-insurance' where Australians who think they are protected, are protected for the wrong eventualities. Having the right coverage can mean the difference between an insurance pay-out, or not.
Insurance is extremely complex, and there are many solutions available, therefore it is important that you seek professional advice in this area.
What should individuals or families consider when working out how much coverage they need?
The first thing to note is that every situation is different and there is no standard formula for such an important area.
Any insurance plan should be developed based on personal circumstances, such as family situation, employment, age, health, child care, education fees, plus many other factors that will determine the level required.
There are possibly many areas that you may overlook. What might be sufficient cover today, might not be sufficient cover for you and your family tomorrow.
As a baseline, the insurance policy should enable you to live debt-free, and for any lump-sum cover to cover all major expenses for your entire family - both now and into the future.
Does income protection cover redundancy?
Income protection is designed to replace any income lost, generally in the event that you cannot work due to illness or injury.
This type of cover is available through superannuation or as stand-alone cover. Whilst superannuation based income protection covers are not able to offer redundancy based benefits, a limited number of insurers offer optional cover for involuntary redundancy.
This is generally an extra cost option and usually limited (e.g. for three months). Some insurers also offer concessions around premium payments in the event of redundancy (for example, they may offer to keep the policy active, even though premiums are not being paid), however in such cases, no income benefits are actually paid out.
Should you purchase insurance within your super or not? What are the benefits of purchasing it within your super?
Only a professional financial planner can truly provide an answer to this question, as it is very complex and will vary from individual to individual.
There are both advantages and disadvantages of this approach. The advantages can include cash flow (you are paying from superannuation money, rather than out of pocket which is after tax) and also tax benefits too. The disadvantages can include less access to benefits (which have to be approved by trustees), less generous cover (for example own occupation TPD cannot be offered through super, nor can trauma cover).
It also counts towards to your contribution limit, even though it is not adding to your actual superannuation balance.
What are the pros and cons of stepped versus level premiums?
Comparing stepped versus level premiums is a similar exercise to comparing fixed versus variable home loans.
In the same way that variable home loans reflect interest rates as they are at that point in time, stepped premiums are a true reflection of your risk at that point in time, based on factors like your age, gender, occupation and state of health.
Every year, your likelihood of illness or injury, and therefore your risk of claiming, increases. Stepped premiums go up in 'steps' each year to reflect this. As you get older, the size of these steps can increase.
Level premiums on the other hand, are calculated to remain steady over the long term.
This gives you certainty about what you pay each year. The downside is that they start off being more expensive (like a fixed rate loan) and in the first few years, can actually cost twice as much as stepped cover.
Over the longer term (10 years or more), you end up saving money, provided you keep you cover in force. This can be particularly beneficial in your late forties and over, where the stepped increases each year can be quite sizeable and sometimes make cover hard to afford, at a time when it is most needed.
Like all insurance decisions, deciding between stepped versus level premiums will depend on your individual circumstances.
Myths
There are many myths around life insurance. Common examples are that life insurance is not required if you are young and single, that it is cheaper to buy life insurance direct and that you only need enough to cover your debts.
It is always better to be safe than sorry. Professional financial advice will ensure there is no uncertainty, and bring you peace of mind that you and your family are adequately covered.
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