A financial plan is a powerful thing, but it’s most potent when supported by a solid insurance
strategy. What are the specific purposes of the main types of personal insurance?
What is the point of personal insurance? Put simply, it can help to smooth out some of the unexpected turbulence that life sometimes encounters, just as motor vehicle insurance can help take the financial shock out of events that can occur on the road.
If you have a financial plan, whether it’s a short or long term one, then your financial journey along life’s road is already mapped out. Serious threats still exist though, particularly in the form of death, illness or injury.
Helping to guard against such threats are three main types of personal insurance – life insurance, total and permanent disability and income protection. But what is the difference between the three? And how can they help to support major life and retirement goals?
Life Insurance: Putting aside the obvious emotional consequences for your family, if you died tomorrow then who would be affected financially, and how? Could the mortgage be paid? How might future school fees be financed? What would happen to the lifestyle of those closest to you?
In the event of the death (and sometimes the diagnosis of a terminal illness) of the insured, a life insurance policy pays a lump sum. The size of this lump sum will depend on the amount agreed with your insurance company.
Such insurance is not necessarily only for the main breadwinner, but for anybody whose death may affect the family’s ability to earn an income. The payment of the lump sum helps to soften the blow of the loss of income, meaning survivors have a better chance of continuing in the lifestyle to which they have been accustomed, and of protecting their financial future.
Potential financial benefits:
- pays debts
- lump sum can be invested for future
- pays funeral costs
- covers living expenses for family.
Total & Permanent Disability (TPD): An injury or illness that results in your being permanently disabled is also very likely to damage your income earning capabilities. But debts and medical bills must still be paid and the future financial health of your loved ones must be managed.
TPD pays a lump sum if you are ‘totally and permanently disabled’ and unable to work. Various TPD products carry differing definitions of ‘totally and permanently disabled’, so ensure this is clarified by your financial adviser.
As with life insurance, the TPD payout amount is agreed before the policy is put in place, to ensure it will do the job of helping to pay medical bills and protect your loved ones financially.
Potential financial benefits:
- pays debts
- helps to cover medical costs
- covers living expenses for family
- funds lifestyle and property changes resulting from disability.
Income Protection: If illness or injury leaves you unable to work for a short or long period, the result on current finances and future plans can be serious. An income protection policy can be put in place to help soften the blow, usually offering up to 75% of your current income to be paid to you in place of your regular income. The replacement income is usually paid monthly, taking away some of the typical financial stresses during recovery and helping to protect future financial plans. Income protection policies cab be highly personalised, including lower premiums for longer waiting periods (replacement income does not kick in until six weeks after disablement, for instance), longer or shorter benefit periods, and either a pre-agreed payout value or a value that is assessed at the time of the illness/injury. Premiums for income protection may also be tax deductible.
Potential financial benefits:
- provides ongoing income to cover living expenses
- helps to cover medical costs
- investment strategy can potentially continue uninterrupted throughout recovery period.
Speak to us for more information or if you would like to understand more.
DISCLAIMERS:
General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
Insight Financial Partners Pty Ltd ABN: 73 101 279 663 is an Authorised Representative of Count. ‘Count’ and Count Wealth Accountants® are trading names of Count Financial Limited ABN 19 001 974 625 Australian Financial Services Licence Holder Number 227232 a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Professional Member of the Financial Planning Association of Australia Limited. Head Office: Commonwealth Bank Place, 11 Harbour Street, Sydney 2000 | 1300 650 432 www.count.com.au.
