How to protect your family from financial disaster.

How to protect your family from financial disaster.

We often don’t hesitate before protecting valuable assets like our homes and cars. How many people do you know that own their home but don’t have home insurance? Similarly, would you be comfortable driving a new car out of the dealership without car insurance?

Most of us see the importance of insuring our assets against financially disastrous events such as damage, theft or loss – but what about our families? Will they be protected if disaster strikes?

This article discusses one strategy to protect your family from the three main causes of financial ruin; death, total and permanent disability and traumatic illness.

Pay off your debts upon death, disability or illness

If you have debts such as a home loan, a car loan or credit card debt, you should pay them off in the event of death, disability or illness. You can achieve this by taking out Life, Total and Permanent Disability (TPD) and Trauma insurance.

Benefits of this strategy…

By taking out Life, TPD and Trauma insurance you can:

  • Ensure a tax free lump sum payment is provided so you can clear your debts; and
  • Ease the financial strain on your family by eliminating all debts if you pass away.

How this strategy works…

Most people will take on debt at some stage in their life. Commonly, debt is used to purchase a home, a car, a business or to fund other investment opportunities (e.g. purchase an investment property).

While many of us will take on debt without hesitation, what we don’t tend to think about is what could happen if something went wrong. For instance, what would happen if you died? Your loan repayments would still have to be made. Could your family cope with this? What if you became disabled or suffered a traumatic illness like cancer? In addition to your loan repayments you would probably have medical expenses to meet as well. Could you and your family get by in this scenario?

If you were the primary income earner and you had a home loan, if you passed away suddenly your lender may even force your family to sell the home. Where would your family live?

Life, TPD and Trauma insurance can eliminate these risks. Each of these insurances can allow you to clear your debts as they provide a lump sum payment. And you can choose a lump sum amount that suits your needs. If you’d like to find out more about Life, TPD and Trauma insurance, contact Financial Planning Expert.

How much cover do you need?

You can work this out in three easy steps:

  1. Look at all your debts and add up the amounts outstanding;
  2. If you have existing Life, TPD and Trauma insurance or other financial resources on hand (e.g. savings), subtract these from your total outstanding debts; and
  3. Consider the legal, administrative and taxation consequences that might apply (e.g. Capital Gains Tax on the sale of assets in the event of death, costs to administer your estate). You should then add these costs to your total outstanding debts.

Financial Planning Expert can explain the types and amounts of cover you may need to clear your debts. Financial Planning Expert can also review your insurance needs over time to make sure you remain suitably covered.

Paul is married to Janelle and they have two young children. Paul is the sole income earner for the family and earns a salary of $85,000. Janelle has been out of the workforce since the birth of their first child and isn’t planning on returning to work until their youngest child starts school.

Janelle and Paul’s home is worth $600,000 and they have a mortgage of $350,000. Their mortgage repayment is $3,000 per month.

Janelle and Paul are both worried that if something happened to Paul, Janelle would not be able to meet their mortgage repayments because she isn’t working. Janelle could return to work, but then she would have child care costs to cover as well. Janelle and Paul therefore decide to contact Financial Planning Expert to discuss their insurance needs.

After looking at their position, Financial Planning Expert points out that Paul has some existing insurance in his superannuation fund. If Paul was to die or become totally and permanently disabled, he (or Janelle) would receive a lump sum payment of $200,000 from this insurance. In addition, Paul’s superannuation fund would also pay out his account balance of $50,000 in the event of death or permanent disability (i.e. $250,000 in total).

To make sure Janelle and Paul have adequate funds to clear their debts, Financial Planning Expert recommends Paul increase his Life and TPD insurance by $100,000. This would mean in the event of Paul’s death or total and permanent disability, a total of $350,000 would be paid out to him (or Janelle). This would allow them to pay off their home loan and reduce their expenses by $3,000 per month.

In addition, Financial Planning Expert recommends that Paul take out Trauma insurance of $350,000. This is required because if Paul suffers a traumatic illness such as cancer, a heart attack or a stroke, his superannuation fund won’t provide a lump sum payment. Trauma insurance for $350,000 will therefore ensure Janelle and Paul are able to pay off their mortgage and allow Paul to recover without having to worry about mortgage repayments.

Contact Financial Planning Expert to make sure you have enough insurance to clear your debts.

Other considerations…

  • You should also consider Income Protection insurance if you are the primary income earner. This will assist you to meet your ongoing household and lifestyles expenses if you can’t work because of injury or illness;
  • Your debt levels will change over time. This means your insurance requirements will also change. Some policies will enable you to change your levels of insurance without having to supply further medical evidence;
  • Life and TPD insurances are generally available in super funds. You should consider the advantages and disadvantages of Life and TPD insurance inside superannuation before taking out a policy;
  • If you are a non-working spouse you should consider Life and Trauma insurance. Life and Trauma insurance will assist you to meet housekeeping, childcare and medical expenses if you pass away or suffer a traumatic illness such as cancer, a heart attack or a stroke;
  • Level premiums may be more cost-effective for you over the longer term. Alternatively, stepped premiums will be more cost-effective now, but will become more expensive than level premiums over the longer term, and;
  • You should seek professional estate planning advice from Financial Planning Expert. This will ensure you understand which assets are dealt with by your Will (and which aren’t) and the consequences that may apply to your estate planning preferences (e.g. tax, protection of assets).

Financial Planning Expert can help you to understand whether you need Life, TPD and Trauma insurance and calculate the amounts of cover you require. Contact Financial Planning Expert on 1300 721 174 or info@financialplanningexpert.com.au for an obligation free discussion.


This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.

Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.

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ABN: 71 545 756 841 Australian Financial Services License: 402042

Phone: (03) 9708 8126

Email: info@financialplanningexpert.com.au

 

 

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    Financial Planning Expert is an independent financial planning business based in Melbourne. We provide genuinely independent and conflict free financial advice. We’re experts in self-managed superannuation fund (SMSFs) advice and strategy, retirement planning, property and share investment advice, life and income protection insurance, tax planning, asset protection, estate planning and advice for Australian expatriates.