Traditional life insurance products have gone through a massive overhaul in the last few years, with significant changes to product and also insurance companies receiving record claims which in turn has driven notable premium increases.
There is a common guideline in our industry that you would only need to take out cover once you have debt, however there are more “what-if” scenarios that we see in our line of work, such as:
- What if at age 25 I was hit by a car, became permanently disabled and would never be able to go back to work doing what I was doing before?
- A young family ready to buy a new home, when a sudden death changes their plans and leaves the surviving spouse a widow with a toddler. What happens then?
- Someone in their early 60s with 3 years out from retirement, where their savings capacity will be just enough to pay off their debt, which is equivalent to their super balance. The death of the income earning spouse leaves the non-working spouse with a debt that will cover their mortgage but does not leave much to live on.
We have covered off some of the most frequently asked questions we receive as a business:
Do I need cover if I’m young?
Given the general guideline of cover starts with being able to pay off your debt, this may not be applicable for the younger accumulators who are in the process of getting into the property market.
We tend to refer back to the actual definitions of the policy to highlight that these covers are designed to provide you with lump sum payments to either:
- Lump sum payment for your family in the event of the unforeseen (Death)
- Replacement of your earning capacity until retirement (Total and Permanent Disability)
- Provide you with up to 70% of replacement income if you are temporarily incapacitated (Income Protection)
- Lump sum payment to support increased needs/reduced income in the event of a Critical Event (Trauma)
As these covers are also designed to support your life, our discussions with our clients tend to revolve about making sure that in the event of the unforeseen, your quality of life/your family’s quality of life does not significantly change. Wealth creation is important however protecting said wealth could make or break your financial plans. We could live our life in the most conservative and healthiest manner, however the fragility of human life means that we are all one bad accident or one bad diagnosis away from having our lives turned upside down.
Is Super Cover Enough?
Most super funds would enrol you in their default cover, although the Protect Your Super (PYS) campaign in 2017 had been enforced on super funds to obtain explicit consent from members that they are aware of their insurance premium deductions due to the amount of premiums paid for policies that people were not aware of.
The question we get a lot is whether the cover held with super is fit for purpose, and it really comes down to your personal needs.
For example, certain types of cover, TPD and IP may be better suited if you were to hold it personally. This is not an option with your super account. Another example would be Trauma cover, which can’t be held through super and must be held personally. Business owners may also need to hold additional covers such as Business Expenses or buy/sell whether super ownership may not be suitable.
It is also important to review the specific of the cover to understand how claim time would look.
Given the relatively affordable premium of these insurance covers, there is a misconception that retail covers could be more expensive. What we find is there are more factors in play that determines this, such as your occupation rating, age, gender. There is no one size fits all product for insurance as every cover is tailored to your personal circumstances.
Trade Offs: Affordability vs Best Case Scenario
An issue we see with our clients often is the unsustainable increase of premiums year on year. This was previously mitigated through holding a level cover which as the premium suggest would support a more level increase of premium, however this no longer holds true in the current environment.
The insurance advice has now evolved from recommended the maximum appropriate cover to strategic compromises that has been discussed from the start, such as partial self-insurance or adjusting assumptions that we use, such as reduced living expenses or factoring in additional help from family.
Conclusion
Whatever the perfect insurance cover looks like for you, it shouldn’t be left to a default setting on a super statement or a guideline that assumes everyone’s situation is the same. A tailored review — one that stress-tests your “what-ifs” against your actual financial position — is the only way to know whether your current cover would truly hold up on the day you needed it most. If you haven’t had that conversation recently, now is the time.