Insurance is probably one of the more frustrating things that you have to purchase – you’re paying money for something that you hope you never have to use. However, in those circumstances when you need to make a claim, it could be the one thing that keeps your whole world together. Typically as you’re building wealth, you don’t have the financial backing to take care of major issues such as sickness that stops you from working for a while, or a disablement that affects your ability to work for life. This is where insurance comes in. Read on to find out the key insurances that you should consider to help protect you and your family.
Life insurance pays out the level of cover insured you’re insured for on your death. You should calculate a level of cover that allows you to repay your debts and ensure that the expenses for your family would be maintained if you were to pass away. Make sure you take into account any anticipated education expenses.
Total Permanent Disability insurance
Total and permanent disability, or TPD insurance, will provide a lump sum payment to you if you were to become totally or permanently disabled. You may not be capable of earning an income, yet you’re still alive and need to be looked after. There are two types, ‘any occupation’, which covers you if you can’t work in any occupation at all (total disablement), or ‘own occupation’, which covers you if you can’t work in the occupation which are you suited to through you experience and education. Typically the cover level is similar to life insurance.
Trauma or critical illness insurance will provide you with a lump sum payment if you suffer from a list of pre-defined medical conditions, such as a heart attack or stroke. It was conceived by doctors after seeing the effects of trauma or critical illnesses on patients’ financial wellbeing and is helpful for going towards the cost of medical treatment. The level of cover for trauma is usually a lot lower than TPD since you’re more likely to return to earning an income.
Income protection insurance
Income protection provides you with up to 75% of your current monthly income to help maintain your day to day living if you were unable to work due to illness. The benefits commence after a waiting period, and are paid monthly for a pre-determined benefit period. You can select what period of time you need to be off work before you get paid which is called the waiting period. There is also a benefit period which can be from 2 years up until the age of 65. The longer the waiting period and shorter the benefit period, the cheaper it gets. However the more it will erode your savings too. You can select a ‘fixed value’ contract where you receive a fixed amount, regardless of your income. A less expensive alternative is an ‘indemnity’ contract, which means the insurer will look at your past 12 months of income and pay the lesser of the monthly benefit on the policy, or 75% of your average income over the past year. It’s important to note though that indemnity contracts can become an issue if you rely heavily on bonuses for your cash flow or take a period of time off work, such as maternity leave. Income protection premiums are typically tax deductible.