How to ‘insure’ you don’t get caught out with surprises
Healthy Bodies, Wealthy Wallets and Happy Minds is a concept that is very relevant in today’s world because all three factors must work in perfect synchrony to give you a wholesome, hassle-free life! Of course, this is a utopian scenario as nobody’s life is perfect; but there are safeguards you can have in place to help ensure you don’t get caught on the wrong foot when life throws you lemons.
So, I’d like to talk about your best insurance options to overcome surprises that you could get caught out with by looking at some of the questions we are often asked. I hope to also give you a keener insight into different types of insurance cover and how they can help mitigate your risks.
What are the surprises you can get caught out with?
The big surprises are primarily loss of job or inability to work, an illness or an accident. What you should focus on is what will happen if you become ill or if an accident happens.
How do we provide protection against these surprises, especially loss of income?
In a situation where you can’t work, you could turn to backup income streams. If you’ve planned well, you could probably depend on the rental income an investment property generates, savings or investments that you could redeem, or your partner or family to support you for a short while.
But, do you know how long you’re going to be without income? That’s probably the toughest question. If it’s due to illness you could be away from work for months, sometimes even years.
You may get Government support to a certain extent, but it may not be enough to replace your salary or even meet your monthly expenses.
What would be the ideal savings amount? Is there a way to work out how much savings one would need as a buffer?
With my new clients, I find out if they have insurance in place; if not, I put an income protection plan in place for them. I work it out in such a way that there is a balance between surplus income and affordable premiums. There are longer ‘waiting periods’ that can be chosen to balance the premiums with cash savings or other investments. This helps decrease the impact of the health premiums on their cash flow.
For savings, the general rule of thumb is that it’s ideal to have a minimum of 3 months living expenses in your bank account at any given time. This is primarily because all insurances have ‘waiting periods’ making it impossible to claim on day 1, even if the need arises.
What is a ‘Waiting Period’?
The waiting period is the time frame between when you lodge a claim with the insurance company till the day they commence paying your claim. For Income Protection Insurance, there could be a 30 or 90 day waiting period – that’s the amount of time you need to be off work before they start paying your claim. For the more serious insurances like Total Permanent Disablement, you may have a waiting period of about 6 months, so waiting periods can be quite long.
What are the things to keep in mind if you have an accident?
If you are an employee, you will have sick leave or annual leave you can rely on – this can help complement your cash savings. But there are other things to consider. Your living expenses will go up with additional medical bills, costs of doctors and specialists. If your situation requires you to change your living arrangement or your car, bills are definitely going to go up!
Depending on the severity of what has happened, you might need personal care or nursing care. If you’re unable to look after your kids, you may incur childcare costs as well.
Many people tend to feel secure if they are insured at work. But this is a false sense of security because, ‘WorkCover’ may pay your medical bills and doctor’s visits, but it definitely will not cover living expenses and additional costs incurred due to your situation. And if you’ve run out of sick leave, ‘WorkCover’ will not compensate your salary.
What about private health insurance?
You may think that private health insurance and Medicare will cover your expenses. But what if you require specialists, massages and all the miscellaneous extras? You will only get about a third to half of that amount rebated back from your private health insurer.
When you’ve got larger bills, you’re going to hit the caps that they have on these types of injuries and illnesses, so you can’t rely only on private health insurance. Another point to note is that private health insurance only covers your medical bills, there’s no cover for loss of income, or replacing your living expenses.
What should be the priority to fully protect ourselves from all potential surprises?
If you don’t have insurance in place or if you haven’t met a financial adviser for insurance advice, the first step would be to check to see if you have insurance cover within your current super fund. Many employees join their employer’s super fund and they will have some cover there, though it will most probably be just life insurance and TPD cover.
If you can’t afford to be off work for a short period of time due to temporary disablement, then you should probably consult an adviser about obtaining Income Protection Insurance. In my experience, most people have Car Insurance and are generally unaware of Income Protection Insurance.
The thing about insuring your car is that you can replace your car if something happens. With Income Protection Insurance, you are replacing your income should you not be able to work. You fund your car with the income you earn from work. So, it’s more important to prioritise and secure your income than insuring your car.
Can you tell us how Income Protection Insurance works and what it is?
Income Protection Insurance does not involve a list of situations that you should satisfy to make a claim.
If you cannot work due to injury or illness and the minimum ‘waiting period’ is over, then you are entitled to your claim. But if you’re away from work for a few days due to the flu, the insurance company is not going to pay out on that.
There is also the ‘benefit period’ which also impacts the premium. If you want a shorter benefit period of two years, and you’re still off work for the full two years, you get paid for that entire period.
You can get benefit periods up to age 65 so if something severe happens to you, you will be replacing 75% of your income till age 65.
Income Protection does not apply if you’re made redundant. Insurance for that is very limited and very expensive.
Besides Income Protection and my Super Fund default cover, what else can one do to be prepared?
Life Insurance applies if you pass away. Total Permanent Disablement is if you can never work again, for example if you’re confined to a wheelchair. Both are lump sum covers which means you qualify, it pays out in a lump sum and the policy ends.
After income protection the fourth insurance is Trauma Cover, probably one of the least known insurance covers in Australia. This covers critical illness events commonly referred to as the Cancer, Heart Attack or Stroke Insurance. If you suffer one of these events you will be paid a lump sum. You can use that to pay medical bills and the additional money comes in handy if you have to be off work.
Trauma Cover works well with Income Protection because both aspects are covered.
Examples of things that have led people to claim and what they’ve used the proceeds for?
Many years ago, I had written an income protection policy for a friend. Recently, she broke her leg playing soccer and was fretting about all the bills she had to pay. My first reaction was, “What’s there to worry about; you’ve got income protection!” With injuries like fracture or loss of a limb, your Income Protection insurance will automatically pay out before the waiting period is over. She got a three-month payment, which covered medical bills and living expenses during the time she was unable to work.
About 18 months ago, I fractured my ankle. I was off work for 6 weeks and I was able to satisfy a claim for a 2 month benefit.
How do you work out how much cover one should have across the different types of insurance?
That is very situation specific. I do calculations based on each of my client’s requirements and they all come out differently.
If you have a family then you must ensure that your family is protected, there’s food on the table, home repairs to be met and the like. There’s an option of home loan repayment for a life or a TPD event. If that is taken care of, it’s just one less thing for your family to be worried about.
I would advise an amount for Trauma Cover to protect you against an event that will generate hefty medical bills, especially in the case of cancer.
Income Protection will generally insure 75% of your monthly income and an additional benefit will contribute to your super fund as well.
My advice is not just about choosing the product, but more so about what the need of the insurance is and how much my client needs to protect what is important to them.
For our single clients, the need for life cover is greatly reduced or not required at all because they don’t have any financial dependants.
It could get expensive to have all these covers. What can be done to minimise the cost?
In some cases there is a need to compromise on what you would like to cover and what you can afford. I keep my clients’ cash flow in mind when I look at premiums, so I’m not going to recommend something they can’t afford.
But we can do different things to structure the premiums. Some insurances can be held inside your superannuation fund, which means some premiums won’t be paid out of your own pocket.
If you have your income protection insurance in your own name and not in your superannuation fund, then those premiums are tax deductible for you.
There are different kinds of premiums that we can work on, that will have an impact on long-term cost savings versus the present price, and how long your need for that insurance is. I constantly review how much insurance my clients have. For instance, while the home loan is being paid down, they may need less cover. So, it’s not a set and forget scenario. It’s my job to reinforce why they’re paying those premiums and envisage the scenarios they would face if they didn’t pay those premiums.
Who should be covered?
Traditionally, people just want to insure the primary breadwinner, because the absence of their income impacts the cash flow. But it is important to cover a non-working spouse as well, because in their absence, you’re probably going to have to take time off work to handle the responsibilities at home as well as the children. If something really severe were to happen to a non-working spouse, then you should ideally be more financially secure. That could help pay off the home loan and maybe give you the liberty to change work to part-time, because the focus on what’s really important changes in these situations.
Kids over 18 also have a need for insurance. It’s definitely not life cover, but more the trauma aspect. There is always the risk of being in a car accident or any other typical age-related incident that could happen. Trauma cover is applicable, and for their age, it’s quite cheap.
You can also anticipate a time when kids or grandkids may turn to you for help. If your retirement is secure, it may be easier to help them with paying their insurance premiums than having everyone move into your home!
Where can we get more information about insurance?
A good general website is ASIC’s MoneySmart website https://www.moneysmart.gov.au/. They have a really good section and relevant information about insurance. You can check out Evalesco’s YouTube videos on insurance and other related topics to give you a better idea on what financial planning is all about.
But if you seek specific financial advice, we at Evalesco are happy to have a chat. We offer a complimentary discovery meeting for new clients, where we can discuss what’s important for them and their insurance needs and what the full process looks like.