Every so often we hear how Australians are under insured, and how income earners and their families experience financial hardship as a result of suffering from sickness, injury, long term disability or death. I’ve developed a quick guide to help you see if you’re at risk, and what you can do to rectify the problem.
1. Do you have insurance?
Recent statistics have shown that 83% of Australians say they have car insurance, and only 31% of those have income protection. Did you know that your income is your biggest asset?
For example, John is 35 years old, earning $80,000 per year and is married to Jane who is a stay at home mum. They have 2 young children, and have a $350,000 mortgage. Over a 15 year period (assuming a salary increase of 3.5% p.a.), John will have earnt over $1.5 million. Looking further in the future, by the time John looks to retire at age 65, he will have earned just over $4 million. How much is your car worth? How much is your house worth? Is it more than your accumulated income?
Many Australian’s don’t think twice about insuring their car or home, but struggle to see the importance of insuring themselves.
2. Where is your insurance held?
Is it held within superannuation, or is it personally owned? Many Australians have some form of insurance via their super fund, and may think that it is enough. But this is often not the case. Super funds offer various insurance benefits according to the fund design, and member eligibility criteria. The amount and type of insurance cover you have could be on a cost per unit basis, or a fixed amount depending on your age, occupation, etc. It is unlikely that the default cover offered via your super fund is appropriate for your specific circumstances.
You should be aware that there may be tax implications for holding insurance within your super fund.
Let’s go back to John. He holds $300,000 of Total & Permanent Disablement (TPD) cover inside his industry super fund, and goes to claim. Due to his age and other contributing factors, out of the total sum insured, he will need to pay almost $73,000 of tax. Leaving a payable amount of $227,000, this is not even enough to pay off his mortgage.
Another thing to keep in mind is that some super funds will decrease your insurance entitlement as you get older. So if you’re relying on the insurance in your super fund, it may not be enough to cover your needs.
3. How much is enough?
- When calculating the required amount of Life and TPD insurance, there are a few things you will need to consider:
- Repayment of debts
- Funeral costs
- A lump sum to allow for home and vehicle modifications
- Future income expenditure. For example, costs of living, school fees, childcare, etc.
- Allowances for tax implications
There are a number of ways to calculate your need for insurance. The best way, however, is to speak with one of our friendly Risk Advisors who can assist with some tailored recommendations.
If I were John’s adviser and he told me he didn’t have any life insurance, I would be asking him this one simple question: how will your family survive if you’re not around to provide?
Please note that the above has been provided as general advice, it has not taken into account your personal circumstances or goals. If you would like more tailored advice, please contact us today, one of our friendly advisers would love to speak with you.