Many individuals take all of the right steps and put in place sensible Wealth Creation strategies that will ultimately lead to financial independence at their target retirement age. Often the main threat to that objective being achieved is illness or injury that results in the individuals earning capacity being reduced or lost either permanently or for a period of time.
To protect against these events it is vital that personal risk insurance is in place. A detailed analysis of your current position and future objectives is required to accurately calculate the amounts you require and how the policies should be owned. Having your policies structured correctly will avoid significant unexpected tax consequences at a time when you need financial certainty and security.
A combination of Life Insurance, Total and Permanent Disability Insurance, Income Protection and Trauma Insurance will provide comprehensive protection against unforseen events.
Total and Permanent Disability
Total & Permanent Disability (TPD) contracts provide a lump sum payment should you become totally and permanently incapacitated through illness or injury.
The most important requirement is for you to have your income fully covered by Income Protection. However, we do not believe that this alone would be sufficient to offset the financial impact of you becoming totally and permanently disabled.
A lump sum is required to:
• Pay for significant costs such as medical expenses and rehabilitation costs.
• Pay for modifications to the home or car to accommodate for your condition.
• Replace the 25% of your income that is not covered by your income protection policy
• Replace the superannuation lump sum that would normally accrue over your working life
Total and Permanent Disability contracts are offered as “Own” occupation or “Any” occupation. “Own” occupation TPD is the preferred definition as the criteria to meet is based on you not being able to perform your own occupation. It provides you with the highest opportunity to make a successful insurance claim. This is reflected in the higher premiums that accompany this form of cover. “Own” occupation TPD cover is only available to certain occupation categories.
The alternative is “Any” occupation TPD which provides you with a lump sum benefit where you are unable to work for health reasons and medical evidence indicated it is unlikely that you will ever work again (in “any” occupation) or you suffer a specific loss or are unable to perform certain duties of daily living. “Any” occupation TPD can be owned under superannuation allowing premiums to be funded by pre-tax contributions.
As with Life Insurance, consideration needs to be given to superannuation ownership v non superannuation ownership.
Life insurance pays a lump sum on the death of the life insured, or, in many policies, if the insured person is diagnosed with a terminal illness that is expected to result in death within 12 months. The lump sum is intended to replace your future earnings so that dependants needs continue to be met. The insurance amount is based on the debt that needs to be repaid and the level of income your dependants will require to meet their needs, including general living expenses, education, child care and housekeeping.
Life insurance can also be used to “equalise” an estate. This is required when you intend to leave a significant asset (e.g. a business, business property or farm land) to a dependant at the exclusion of others. The life policy can be held so that all beneficiaries receive an equal inheritance.
Consideration always needs to be given to how life policies are to be owned. There are advantages and disadvantages associated with owning life insurance in superannuation which must be taken into account before establishing a policy.
Child Trauma Insurance
Child Trauma policies provide a lump sum benefit in the event of a child suffering a trauma condition. It allows the parents to take time away from work to either care for the child at home or in hospital which may be some distance from home.
Child trauma policies are often provided as an option under an adult Death, Income Protection or Trauma Contract. There are sum insured guidelines including upper limits of around $100,000 to $200,000 depending on the insurer. The entry age for this option is around 2 – 5, depending on the insurer.
There is, as with the adult version of Trauma insurance, a specified list of child trauma conditions including death. The lists of specified events vary across insurers and all have a range covering injuries and common illnesses.
The benefit if not yet paid out will automatically expire at a set adult age, usually 18 or 21. At this point, some contracts will allow the child cover to convert to a Death and Trauma contract without the need to provide medical details.
Buy Sell Agreement Funding Insurance
Life Insurance and Total and Permanent Disability Insurance are often required to fund a buy/sell agreement. A buy/sell agreement is a contract usually entered into between business partners pursuant to which the surviving partners are bound to buy out the other partner’s interest in the business should a specific event occur. Specific events which may trigger a buy/sell agreement include death, divorce, long-term disability, retirement or bankruptcy.
The insurance policy is required to provide the surviving business partners with the money to be able to buy out the deceased/disabled/departing partner’s interest.
Income Protection Insurance replaces up to 75% of your income from employment should you become ill or injured to the point where you are unable to work temporarily or indefinitely.
Without this protection, it would be difficult to meet day to day costs, service loans, meet additional medical costs and continue to save for your retirement.
Income Protection policies will pay you an income for the nominated period of time after a nominated waiting period.
The premiums are tax deductible to the life insured and any benefits received should you claim will form part of your assessable income in the year they are received.
The incidence of people surviving a mild heart attack is increasing. The number of people surviving a cancer is also increasing, but it is without doubt a highly traumatic event and an event that leads people to reconsider their goals, lifestyle and commitment to the workplace.
In such an event a lump sum of capital would be essential to provide for debt reduction, unforseen expenses, rehabilitation costs, lifestyle changes and ensure cost is not a restraint on getting the best available care or treatment.
Trauma insurance pays a lump sum equal to the sum insured or part thereof depending on the event suffered.
Business Expense Insurance
Insurance can also be obtained to meet business expenses in the event the principal, or a primary income earner is unable to work.
A Business Expense policy will provide the business with an income equivalent to expenses of the business that were proven at the time of application.
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication. You should also obtain and read a copy of the Product Disclosure Statement before making any decision to acquire a financial product. Jason Ellis of Southern Finance Solutions Pty Ltd, Authorised Representative of Politis Investment Strategies Pty Ltd, ABN 71 106 823 241, AFSL 253125.