Paying insurance premiums must be the most unrewarding expense in my budget. Sometimes I feel as though I’m just lining the pockets of the insurance companies with premiums for a policy I’m just never going to need. The truth is the numbers tell a very different story. A Sydney financial planning firm released statistics in 2013 showing that over 85,000 people claimed in excess of $5 Billion on insurance policies and that’s without considering the people who were able to access their superannuation early due to medical reasons. Tali Sharot gave a TED talk surrounding the ‘Optimism Bias’ which highlights our tendency to shift our personal bias towards positive events occurring and negative events being avoided. Basically, Tali was telling us that it’s the human condition to ignore the odds in favour of themselves which therefore explains why we severely underestimate our need to be personally insured.
Unfortunately, the reality is bad things do happen to good people all the time. The biggest asset we have for most of our lives, the ability to earn an income, can be lost instantly if we suffer a significant medical event. Without adequate insurance in place we are left financially at the mercy of government policy. Currently the disability pension is worth $21,500 per year for a single person and $32,500 per year for couples combined. No matter how you slice the cake, the government pension payments are barely enough to support the disabled let alone support their families. The frightening part of Australian culture is the chronic levels of under-insured people that exist and the kind of impact that can have on society. If you’re keen to know more check out this great piece by Lifewise on the economic effects of Australia’s current situation.
I believe a major cause for our under-insurance is a lack of information and education provided to the Australian populace regarding what type of insurance, and how much, they should have in place to protect themselves and their families. Also, in recent times most insurance brokers have acted more like used-car salesmen which certainly did no favours for the consumer’s trust in the insurance. Thankfully the industry is now changing but understandably the wariness from consumers that were previously targeted lingers.
How Much Cover Should I Have, And What Kind of Cover?
The first thing that often jumps into people’s mind when we talk personal insurance is life insurance (or death cover in some more morbid circles). Life insurance is significantly the most well-known personal insurance in the general population and also pretty simple to understand. Whilst life insurance is incredibly important it only makes up a portion of the personal cover an individual should have in place. There are four main types of insurance that we typically discuss in financial planning:
- Life Insurance
- Total & Permanent Disability Insurance (TPD)
- Trauma Insurance
- Income Protection
Taking into consideration our personal circumstances we should hold a combination of the insurances mentioned above so that no matter what bumps are in the road for our personal health, our families (including us) have the capacity to live out life as we had planned. Typically this means for life and TPD insurance we generally should cover our debts and a provision for the lost income by our inability to return to work. Trauma insurance covers the significant medical costs of a serious life event in (Heart attack, Cancer, Stroke etc) and allows the time you and your family need to fully recover before going back to work. Trauma is one of the most important types of insurance as it both relieves the stress of returning to work too soon and also has the greatest opportunity to claim out of all four insurances. Due to the frequency of claims it is the most expensive type of insurance therefore it’s best to talk to a professional and ensure the right balance between what’s required and what is affordable is achieved. Finally Income Protection should cover 75% plus superannuation of your current wage. The added bonus of Income Protection is that it’s also tax deductible which creates great value for those that are in a high tax bracket.
It’s also important to note that insurance can often be provided as default cover through your superannuation. Life, TPD and Income Protection insurance can be held as standard cover in industry superannuation accounts. You should be able to see how much cover, and what it’s costing you either online or on your statement they mail out to you at least on an annual basis. It is an insurance that you pay for so it’s important that you’re aware about what it provides you in comparison with the market.
Who Should Put Insurance in Place?
Almost every working age Australian should have some sort of insurance in place for themselves, the difficult question is what you need for your stage of life. How you should structure your insurance and the types of cover you need to have differ throughout the course of your lifetime. If you have any questions about your insurance cover and would like any further assistance feel free to contact me and I’ll assist you as best I can.
Please note that Get Finucated is not a Financial Adviser and the information contained on this website may be considered as general advice only. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances.
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