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Income Protection & Life Insurance

Why You Should Protect Your Income, Asset and Lifestyle if the Unexpected Happens

Most insure their house, contents and car. But few think about insuring their most valuable asset – THEMSELF!

Whether you are single or married with a family, you rely on your ability to earn an income every day. Think about it. How many things do you do every day that don’t cost money? From the moment you wake up each morning you begin spending. Turning the lights on, having a shower and eating breakfast. It all costs money. Why then, do so few people (around 20%) take out insurance for their income? We all insure our homes and cars but the reality is you wouldn’t have either of these without your income.

In our experience, the majority of people don’t insure their incomes because:

1)      They aren’t aware income insurance is available

2)     They don’t understand what their income is really worth

3)     They have a perception that it will be expensive

4)     They don’t think they’ll ever need to claim on an income insurance policy

5)     They think there will be too much paperwork involved

To illustrate why insuring your income should be a major priority, consider the following example comparing car insurance with income protection insurance.

Tony is 40 years old and works as an Advertising Executive. He earns a salary of $80,000 pa, is healthy and doesn’t smoke.

Car insurance

Tony has just arranged a loan for $30,000 and purchased a new car. Before driving home from the dealership he arranges a comprehensive car insurance policy. The insurance costs him $700 for the first year. After 5 years, Tony’s car is valued at $9,000 and due to inflation, his car insurance is now costing $812 pa. Tony has now paid off his car loan and including interest, he paid $38,220 over the loan term.

The table below provides a summary of Tony’s situation:

Year ending Car value Insurance premium (indexed to inflation 3% pa) Insurance premium as a    % of car value pa Loan repayments (cumulative)

1

$24,000

$721

3%

$7,644

2

$18,000

$743

4.1%

$15,288

3

$15,000

$765

5.1%

$22,932

4

$12,000

$788

6.6%

$30,576

5

$9,000

$812

9%

$38,220

25

$1,000

$1,466

147%

Now let’s look at income protection insurance.

Income protection insurance

Tony arranges an income protection policy to cover 75% of his income if he can’t work due to illness, injury or disability. Tony has 4 weeks leave owing from his employer so he chooses a 4 week waiting period on his policy. Tony expects he will work until age 65 so he chooses a policy with a benefit period to age 65. This means that if Tony could not work ever again, the policy would continue to pay 75% of his income (indexed to inflation each year) until he reached age 65. Tony sees a financial planner and takes out an income protection policy. It takes around 45 minutes to complete the online application form and the premium is $1,010 for the first year. Tony’s financial planner advises Tony that he has a one in three chance of claiming on the policy over the next 25 years. His financial planner also advises Tony that he can claim the premium for his income protection policy as a tax deduction. The deduction reduces Tony’s premium cost to $707 in the first year. Because Tony is relying on his income to build wealth for his retirement, he wants to keep his policy in place up until age 65. To save money over the long term, Tony chooses a policy that will not increase in price as he gets older. This means the premium for his policy will increase each year in line with inflation, but will not increase as a result of Tony becoming older (and therefore a higher claims risk for the insurance company).

The table below provides a summary of Tony’s situation:

Year ending Income earned pa       
  (indexed to inflation 3% pa)
Amount insured pa       (75% of income earned) Insurance premium pa* (indexed to inflation
  3% pa)
Insurance premium as a    % of income insured pa

1

$82,400

$61,800

$1,040

1.7%

5

$92,742

$69,556

$1,171

1.7%

10

$107,513

$80,635

$1,357

1.7%

15

$124,637

$93,478

$1,574

1.7%

20

$144,489

$108,366

$1,824

1.7%

25 (Tony age 65)

$167,502

$125,627

$2,115

1.7%

Total income earned over  25 years

$3,004, 243

Total amount insured over 25 years

$2,253,182

Total insurance premiums paid over 25 years

$37,929

* Excluding tax deduction

Assumptions – Tony’s income increases in line with inflation of 3% pa, he doesn’t receive any pay increases, no breaks in employment

This example illustrates that:

1)      Income protection insurance is better value than car insurance. Over 25 years Tony has paid $37,929 for an income protection policy to protect an asset (his income) that is constantly growing in value. If Tony was unable to work due to illness, injury or disability, his income protection policy could provide him with up to $2,253,182. Conversely, over the same time frame, Tony has paid $26,287 for a car insurance policy to protect an asset (his car) that is constantly depreciating in value. As the value of the car decreases, so does the value of the policy.  

2)     Tony’s income is a much more valuable asset than his car. It is therefore far more important for Tony to insure his income than his car.

3)     If Tony’s car was stolen or written off and he didn’t have car insurance, the financial consequences would be far less significant than if he was ill, injured or disabled and he didn’t have income insurance.

4)     Tony’s income protection policy actually assists with protecting his car. If Tony couldn’t work, payments from his income protection policy could assist him to make his loan repayments. Without income protection insurance, he may be forced to sell his car and repay the loan.

Protecting your income with income protection insurance is one of the most important financial decisions you can make. If you don’t, you are risking not being able to meet your financial commitments, provide for your family, your lifestyle and not being able to invest and build wealth for retirement. Can you afford to take the risk?

Life Insurance

Chances are you will need to consider life insurance at some stage during your lifetime. Whether it’s to protect your family home, protect your children’s education or to simply provide for funeral costs, most Australian’s will need to consider life insurance at some point. An important thing to remember is that you don’t take out life insurance for your own benefit. After all, you won’t be around if your policy pays out will you? You take out life insurance for the benefit of your (financial) dependents and loved-ones. You nominate your beneficiaries when arranging a policy. After your death, a life insurance policy can provide your beneficiaries with financial options and security that they otherwise would not have had. This makes things much easier for your dependents because they will be going through a traumatic-enough time after your death as it is. Having to worry about financial issues as well places additional stress on dependents during a very emotional time.

So, do you need life insurance?

To help you decide, below are the most common reasons why life insurance is taken out.

  • To clear debt

Given the significant amount of debt Australian’s owe, it’s not surprising that this is the primary reason why most take out life insurance. Couples and families that have mortgage debt, credit card debt, car loans and any other personal debts should consider life insurance. This is particularly important where one spouse is working and the other is a homemaker. In this instance, if you are the main income earner and pass away suddenly, your non-working spouse will have no means to continue making mortgage repayments, let alone other living and household expenses. They could return to work, but having to go out and find a job immediately following your death is not ideal. And what if you have young children? If your spouse returns to work, child care arrangements would need to be made which will incur cost. Furthermore, it may take some time for your spouse to find a job, they may have been out of the workforce for an extended period and have to invest in further education or up-skilling, and they may not be able to generate the same income as you. This means that your spouse may not be able to support your current mortgage (and other expenses) and have to sell the family home and downsize. You can avoid this situation by taking out a life insurance policy (on your life) to the value of your outstanding mortgage. This would ensure your family can stay in the family home. However, your spouse would still need to meet household and living expenses.

  • To provide an income stream for family

In addition to clearing debt, taking out life insurance to provide an income stream for your family should be considered. As shown in the example above, even if you have enough life insurance to repay all your debts, your dependents still need to meet household and living expenses. If your spouse is working and you don’t have children, it may be acceptable to insure for your debts only. However, don’t forget to consider that your spouse will need time away from work to grieve after your death. On the other hand, if your spouse is a homemaker and you have young children, you should consider using life insurance to provide an income stream so they can meet expenses. This would ensure that your spouse is not forced to return to work after your death and could continue bringing up your children as you intended.

  • To pay for children’s education

Education fees can be very expensive. If you are planning on paying for your children’s education (e.g. private school fees, university fees) you should consider using life insurance to meet these expenses. Consider that it might be difficult for your surviving spouse to meet these costs on their own. When you calculate the long term cost of your children’s education for life insurance purposes, remember that education fees, generally speaking, increase each year at a rate far greater than inflation (e.g. 5% pa or greater).

  • To pay for funeral expenses

Over the last 20 years, funeral expenses have increased in price significantly. Today, the average cost of a funeral is around $15,000 and payment is usually required at very short notice. If getting access to this amount of money in a short period of time is an issue for your family, you should consider using life insurance to meet the cost.

  • To protect your wealth

If you have investment assets under finance such as rental properties or share portfolios, you should consider using life insurance to pay out the finance. But why not just sell the asset and repay the loan if you pass away? If you are single, selling the asset often makes sense. However, if you have a spouse (or a family), you should consider paying out the loan and keeping the asset. You may feel this isn’t necessary if you’re not here, but remember your spouse will still have financial goals of their own. If you need to, go back and review the reasons why you bought the asset. The reasons are often similar; for retirement, to secure your financial future, to achieve capital growth. At the time of purchase you obviously felt it was the right decision to make the investment, so unless anything has changed, why would you not retain the asset for the benefit of your surviving spouse and family? In the case of an investment property, once the loan is paid off, your family has an income stream for life and an asset that will continue to appreciate in value. If your spouse is a homemaker and does not intend on returning to work, you need to remember that they won’t be accumulating funds for retirement in superannuation. You could therefore consider the investment property a superannuation fund for your spouse. Paying out any loans therefore protects the future ownership of your leveraged assets and ensures your wealth creation plans remain on track after you have passed away.

  • To equalise your estate

Life insurance can provide a solution if your estate planning position includes ‘lumpy’ assets such as property. Lumpy assets are assets that are high in value (so they form a large part of your estate), cannot be physically divided into a number of shares, or sold off in parcels. Lumpy assets can cause estate planning issues if you have a number of beneficiaries and don’t wish to split all your assets evenly. For example, let’s assume you have three children, two of which are married and have their own homes. Your third and youngest child is still single and renting. This does not look like changing anytime soon. You want to divide your estate evenly between your three children, but you want to leave your family home to your youngest child. However, because the property is your most valuable asset, leaving your other assets to your other children means they will receive a much smaller share of your estate. This scenario is reasonably common. If you are in this position, you should consider equalising your estate with life insurance. To do this, you firstly need to work out the shortfall between the lumpy asset(s) and your remaining assets with respect to the number of beneficiaries. You then need to consider the tax implications to ensure the net value of your assets is equal after your death. Once you have done this, you can arrange life insurance to cover the short fall. Once your life insurance is in place, you should consider reviewing the sum insured as the value of your assets will change over time. You should obtain valuations for all your assets every year to and make changes to your life insurance as necessary.

In addition to life insurance, you should consider whether you need Total and Permanent Disability (TPD) and Trauma insurance.

Total and Permanent Disability Insurance (TPD)

TPD insurance can provide a payment in the event you become totally and permanently disabled. The reasons you would consider TPD insurance are similar to life insurance (with the exception of funeral expenses and estate equalisation), however, there are differences. The differences come about because in the event of becoming totally and permanently disabled, you are still alive. This means you need to consider the financial implications of you being permanently disabled on you and your family.

In addition to clearing debt, providing an income stream, paying for education and protecting your wealth, below are other common reasons for considering TPD insurance.

  • Medical expenses

If you became permanently disabled you may require frequent visits to your GP, specialist or hospital. You could be taking medications permanently as a result of your disability and you may need to have an operation, or series of operations, due to your extensive injuries. You’ll also need checkups on a regular basis. Even if you have private health insurance, it is likely you will incur some out of pocket costs. You should consider how any additional costs, such as medical expenses, could affect your family’s financial situation if you become permanently disabled.

  • Care expenses

It is very likely you wouldn’t be able to look after yourself if you became permanently disabled. You would need assistance with basic daily tasks such as getting out of bed, eating and drinking, showering, getting dressed and undressed and using the toilet. If your spouse was working prior to your disablement, they might need to give up their job to be your carer. Alternatively, they might continue working and arrange for an in-home carer. The cost for in-home care can be as much as $70,000 per year. If you have young children, the financial impacts may be even greater. It may be too much for your spouse to care for you, look after your children and run the household. Additional help may needed. Similarly, if your spouse continues to work, in addition to the cost of in-home care for you, child care expenses would also apply. You should consider how you and your family would cope these expenses.

  • Modifications to your home

It can be difficult to get around the house without assistance if permanently disabled. A range of modifications to your home (and maybe your car) is often required to make things easier for you. Depending on the extent of your disability, these can range from simple installation of various handles and rails through to installing ramps and widening doorways to suit a wheelchair. You may also need a special bed with a full range of adjustment so you can sleep comfortably at night. Although costs for modifications are generally once-off, they are often underestimated. It is not unusual for such costs to exceed $100,000.

By taking out TPD insurance, you can ensure that your family’s financial position is protected in the event you become permanent disabled.

Trauma Insurance

Trauma insurance can provide a payment in the event you suffer a traumatic illness such as cancer, heart attack or stroke. Again, the reasons you would consider trauma insurance are similar to those already discussed, however, one thing to be mindful of with traumatic illnesses is that recovery is possible. This is obviously not the case for life (death) and TPD. Because recovery is possible, there is often less need to insure for all the reasons considered above. Despite this, however, trauma remains one of the most important insurances to have in place because your probability of suffering a traumatic illness is far greater than death or becoming permanently disabled. In most cases, trauma insurance is taken out to clear debt and fund medical expenses, but with the exception of funeral expenses and estate equalisation, it is used for other reasons too.

If you are unsure whether you need life, TPD or trauma insurance or need help working out how much cover you need, contact Financial Planning Expert on 1300 721 174.

Don’t put off protecting your income, assets and lifestyle any longer – contact Financial Planning Expert or call (03) 9708 8126 to arrange an obligation free consultation with an insurance specialist today.


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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    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.