What I Wish I’d Known – Financial Advice for My Younger Self #2: How To Pay For Insurance

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By Ross Munro, Financial Adviser

We tend to feel pretty invincible when we’re young. We’re optimistic about the future and not ready to consider the ‘what ifs’: stroke, heart attack, melanomas, chronic illnesses or injury and even death.

I’m lucky not to have experienced any of these, but I’ve known many people ‘just like me’ who have and weren’t prepared. The good news is, there’s a range of insurance policies available to protect our wealth, our business and our families in the event of our death or disability or the loss of a business partner. But one thing I wish I’d known is that there’s a significant benefit in taking out insurance when you’re relatively young. Keep reading for the insurance advice I would give my younger self.

When you purchase life, total and permanent disability (TPD), income protection or trauma insurance, you can choose whether to pay for it in ‘stepped’ premiums or ‘level’ premiums. My advice, in summary, is to consider paying level premiums if you’re under 40. This short video provides a helpful overview.

Most policies are paid for in stepped premiums. These are calculated according to your age and recalculated each year when you renew the policy. You pay for the risk associated with your current age, which means that your premium increases as you age as the likelihood of a claim increases. So the older you get, the more you can expect to pay.

  • A disadvantage of paying stepped premiums is that some people may no longer be able to afford the same level of cover as they age (and potentially have more need for the cover) and the premiums increase.
  • An advantage of paying stepped premiums is that they are generally cheaper at the start of the policy, making it more affordable to hold insurance in the short term.

In contrast, level premiums are calculated according to your age when you open the policy, and usually don’t change (other than to reflect CPI and the insurer’s fee) until you are 65 (at which time they revert to stepped premiums).

  • A disadvantage of paying a level premium is that it usually costs more than a stepped premium in the very short term, although you’ll generally get pay-back after seven to eight years.
  • An advantage of paying a level premium is that you know in advance what your premiums will be and can plan accordingly.

Further considerations

  • If you’re under 40, it’s definitely worth considering level premiums as, by the time you are 65, the total cost of your insurance policy will usually be significantly less than if you had chosen stepped premiums.
  • As a young professional, you are likely to be able to afford the initially higher level premium given that you have fewer financial commitments. And later, as your expenses and financial obligations increase, you will be able to enjoy the fact that your insurance premium won’t.

Get financial advice early

You should discuss the advantages and disadvantages of stepped and level insurance premiums for your particular circumstances with your financial adviser. Seeking the right advice early is key, but do your homework and choose a professional who feels like a good fit.

Here are some tips on how to choose a firm to advise you:

  • Ask for recommendations from your peers.
  • Check out a firm’s and advisers’ credentials and read their client testimonials.
  • Enquire about their specialisations.
  • Contact them by phone or email, and start asking questions.

If you (or a young person in your life) would like to talk to a financial adviser at Stratus Financial Group about cash flow, super, insurance or any other financial matter, please contact us. It will be our pleasure to help. Phone (07) 3007 2007 or email rmunro@stratusfinancialgroup.com.au


Related Articles

What I Wish I’d Known – Financial Advice For My Younger Self Series

  1. Three Golden Rules for Money Management
  2. How To Pay For Insurance
  3. A Most Important Financial Planning Tool
  4. An Effective Super Strategy for Professionals

Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Stratus Financial Group strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.

Taxation outcomes are illustrative only. Always confirm your tax position with a registered tax agent.

Income Protection Insurance – Protecting Your Most Important Asset

Your ability to generate an income is arguably your greatest asset, yet only 31% of self-employed Australians and 6% of employees have income protection insurance[1] despite findings that indicate that one in three Australians will be kept from work by an accident or illness.

Imagine suddenly being unable to meet your financial obligations including mortgage payments, school fees and living expenses. In this article, we discuss important income protection information for employees and business owners  and to find out why an understanding of income protection is also relevant for retirees with adult children.

“She’ll be right, mate.”

There’s a worrying trend in Australia when it comes to financially protecting ourselves, with 95% of Australian families not having adequate levels of insurance.[2] Our “She’ll be right” attitude doesn’t match our reality. For example:

1. One in three Australians will be affected by an accident or illness that will keep them away from work for more than three months.[3]

2. It is estimated that 38% of working Australians would last less than a month without their regular income before needing to sell assets.[4]

3. It is estimated that 20% of mortgage defaults are due to an accident or illness of a person in the household.[5]

These statistics show how important it is to check that you have appropriate income protection insurance that safeguards your lifestyle – and that of your family – now and for the future.

Income protection insurance for employees

Income protection insurance is designed to protect your lifestyle to enable you to meet ongoing financial commitments such as mortgage repayments, school fees and living expenses. Income protection insurance usually pays up to 75% of your income in the event of an accident or illness, until you are able to return to work. You can also insure your future superannuation contributions. Policy terms vary and usually specify a benefit period of a maximum of two to five years, and an age limit of 60 or 65.

Income protection insurance for business owners

Income protection insurance is especially important if you own a business. It will cover your personal financial obligations, and also a salary to replace you while you are away. When considering the details of your insurance, you should consider the financial viability of your business as well as your personal financial obligations if you were unable to work.

Information for retirees with adult children

If you have an adult child with dependent children, it’s possible that they don’t have adequate insurance protection against being involved in an accident, becoming ill or death. As a grandparent, have you thought about how their underinsurance may impact you as well as them? Naturally, you would do everything you could to help if your adult child had an unexpected accident or became ill. But we all know that raising a family costs a lot of money.[6]

If something were to happen to your adult child whereby they could no longer earn an income, can you imagine the impact this could have on your grandchildren’s standard of living? And as a retiree, it may not always be possible for you to provide the financial assistance they need.

This is why an effective way to help your children financially is to make sure they’re adequately protected against accident, illness and death. For example:

  • Life cover can provide financial security for your child’s family in the event of their death, with a lump sum payment or instalments;
  • Trauma protection could provide a lump sum or instalments to help maintain the family’s lifestyle if your child was diagnosed with a critical illness;
  • Total and permanent disablement (TPD) cover could provide a tax-free lump sum or instalments if your child was unable to work due to illness or injury; and
  • Income protection insurance policies may cover up to 75% of their regular annual pre-tax income if they are unable to work due to illness, accident or injury.

A tailored solution

Your Stratus Financial Group Adviser can tailor an income protection policy for your (or you adult child’s) circumstances. The policy may cover additional health traumas such as heart attack, cancer or stroke. We may also be able to negotiate longer benefit periods than those offered in default super policies or other policies that are not underwritten. If you are a retiree, please contact us for suggestions on how you might approach a conversation about income protection insurance with your adult child, to encourage them to consider adequate cover to protect their family in the event of death, illness, accident or injury. Please contact Stratus today on (07) 3007 2007.


[1] TNS/IFSA investigating income Protection Insurance in Australia July 2006 and CommInsure 23/1/2008
[2] Lifewise/NATSEM Underinsurance Report – Understand the social and economic cost of underinsurance February 2010
[3] TAL and FSC Under insurance key facts study 2009
[4] Zurich Misinsurance Whitepaper February 2014
[5] Mortgage default in Australia: nature, causes and social and economic impacts, Australian Housing and Urban Research Institute, March 2010
[6] A 2013 AMP / Natsem (National Centre for Economic Modelling) report showed that it costs about $452,000 in 2013 dollars to raise two children from birth to age 20.


Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Stratus Financial Group strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.

Taxation outcomes are illustrative only. Always confirm your tax position with a registered tax agent.

Making the Most of Super 3 of 4: Super and Insurance

Research in 2013 revealed that most of those surveyed didn’t know what insurance cover was included in their super accounts, and whether it was appropriate for their needs. Additionally, about 73% of respondents didn’t understand insurance in relation to super. [1]

While there can be many advantages of holding your insurances inside superannuation, it is important to seek professional advice so that your risk strategy decisions are appropriate for your personal circumstances and integrated within your overall financial strategy.

Insurances & superannuation

Superannuation is among the most effective retirement savings strategies available for Australians. As well as the many tax concessions associated with super, the Government allows tax effective options for purchasing personal insurances, including Life Insurance, Income Protection Insurance and Total and Permanent Disability Insurance (TPD), through your superannuation fund. It is estimated that 83% of superannuation fund members use the default insurance policies[2].

Advantages of holding insurances inside your superannuation fund

There can be cost advantages associated with insurances held within superannuation funds. Many superannuation funds will offer reasonably priced policies as part of that institution’s group insurance policies, although increasing claims over the last few years has resulted in significant increases in some group insurers’ premium prices. Typically these policies offer a basic level of cover only.

Further, holding insurance policies within your super can give you the flexibility to pay for the premiums from your before-tax income or your after-tax income, however it is important to seek advice to determine which option is most appropriate for your personal circumstances.

The default insurance policies within superannuation often include Total and Permanent Disability (TPD) and Income Protection as well as Life Insurance and usually minimal medical information is required for the basic levels of insurance coverage.

Is it what it’s cracked up to be?

While holding personal insurance through superannuation may be a tax effective option for some; there are some pitfalls and other factors that need to be taken into account.

Perhaps the biggest concern associated with most insurances held within super is that the insurance is not tailored to your specific circumstances and stage in life. Most default insurance policies within super are not underwritten which means you are not required to provide personal health or financial information until you claim. This can result in your claim not being paid.

Not only can this result in policies being more expensive, but it could also mean that you are not adequately insured and this could result in dire financial consequences for you and your family if the unexpected were to happen. It is estimated that half of industry super fund members are underinsured by $100,000 for Life Insurance and by $1,000 per month for Income Protection insurance.[3]  This default insurance cover which is not underwritten is usually automatically provided within your superannuation fund. It is possible to arrange to have an underwritten policy within your super, which can be more cost effective than the default policy.

If you change jobs and your employer super contributions stop, or if you move to a different super fund, your personal insurance cover may end without notice or you could be subject to waiting periods, leaving you without insurance cover.

Paying premiums from your super fund can also affect the amount of money available within the super fund for investment. This can have a significant impact on retirement savings. Personal insurance premiums usually increase as you age meaning you could erode your superannuation savings as you move closer to retirement.

Risk protection is an important part of your overall financial strategy and your insurance protection should align with your Estate Planning and the wishes you have outlined in your Will. Often the decision about distribution of funds from a superannuation fund rests with the Trustee of the super fund which could mean that benefits or entitlements in the event of a claim may not be paid to whom you intended.  These complications are less likely when insurances are held outside of superannuation.

There can also be other legal and financial complications associated with insurance claims held within super, which could leave your beneficiaries facing unexpected tax liabilities with some entitlements being considered assessable income for certain beneficiaries.

Your loved ones could also face lengthy delays due to conditions of release or other clauses associated with superannuation funds, which may not be the case for insurance policies held outside of super.

Understanding the claims process and the full implications of holding your insurance within superannuation should be discussed with your Fortnum financial adviser. The complexity of personal insurance options and importance of adequate and appropriate insurance cover for your stage of life and needs, should never be underestimated.

Review your super with your Stratus adviser

We hope you take us up on our invitation for a discussion any aspects of your super and how your super is integrated with your whole-of-life financial planning. Please call (07) 3007 2007, or contact us via our website.


Related Stratus articles:

Types of Insurance
Life Insurance within Superannuation
The Misinsurance Phenomenon

Making the Most of Your Super Series:

  1. Contributions
  2. Structures & Investments
  3. Insurance
  4. Estate Planning

 


[1] http://www.superannuation.asn.au/policy/reports
[2] http://www.canstar.com.au/superannuation/life-insurance
[3] Sweeney research. A joint report by The Australian Institute of Superannuation Trustees (AIST) and Industry Funds Forum (IFF) 2008


Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Stratus Financial Group strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.

Taxation outcomes are illustrative only. Always confirm your tax position with a registered tax agent.