I have a client who has Trauma, income protection, and life insurance via her Super. This was something that her superfund organized.
Like most people she did not understand the level of cover and did not think much about it. It was something her Superfund dealt with and every 6 months when she got her statement, she saw the amount deducted for insurance but never questioned if it was right for her.
Then she became ill. She tried to work in between illnesses but claimed on income protection. The policy paid but it really was not enough considering what she was earning. Then the payments stopped as she got better only for her to fall ill again. She made a second claim which was approved but now the insurance company has stated that she will be classified as permanently disabled.
This means she will receive a payout of $500,000 but no further claims can be made which means income protection stops and she loses her other benefits such as life insurance.
Here’s the problem. She is 38 years old, with a young family. They want to buy their own home and will use some of the payouts for a deposit. As a family, they will have mortgage payments and debt, but their family income will go down because income protection has stopped.
So, the conversation is now based around mortgage payments, lower income, medical costs, and raising a young family. Not a nice place to be.
Our financial planner will work on a plan to use some of the money as a deposit and invest the rest to provide an income to replace the income lost. But that will mean the money cannot really be invested for growth. It must be invested to maximise income. This is something you do when you retire, not when you are young.
There’s more. As she cannot work there will be no more additions to super. She will not be able to apply for a new income protection policy and she also has no life insurance cover either.
It should not be this way.
Everyone, irrespective of age should know and understand what their protective insurance covers.
You must always speak to a financial planner but generally having different polices may be better even if more expensive. This is because if one policy pays out the other policies remain. So, let’s take trauma, income protection and life cover.
In this case if there were three separate policies you could make a claim on income protection and trauma. The trauma policy would pay $500,000 and the life cover policy will continue. For income protection, the policy will continue and if set up correctly would pay until the age of 65. In the case of my client maybe another 27 years.
Yes, the policies would be more expensive but how much stress would this reduce when claims are made.
Here is what you should consider doing:
- If you have policies in Super get in touch with them and ask for policy details, especially what is covered. This should take you about 15 minutes to do.
- If you have policies outside Super, then get in touch with your insurance company and ask for all the details. Again, this should take you a few minutes.
Then give these details to a decent financial planner to work out if it is enough. If you do not have a financial planner get one. Basically, ask yourself:
- If I make a claim will it affect any other benefits?
- If I cannot work and need to rely on my income protection will the amount I get paid be enough to live the lifestyle I want?
- If I claim on trauma what will I use the money for? Pay off debt? Invest? Will it be enough?
- If I die will the money received by my family be enough to clear off debt and allow them to live a lifestyle I would like them to have?
And do not assume that only breadwinners need life insurance or cover. My wife runs a business and like most women is amazing at multitasking which includes childminding and making sure school matters are dealt with plus more.
If anything were to happen to my wife it will mean that this work still needs to be done and I have no idea where the iron board is or what it looks like, which class my kids belong to or even what their favourite cereal is.
I am a man and that means I don’t think with a brain. Men may have progressed from axe operators to smartphone operators, but we are not smart. We are still cavemen who wear branded clothes.
It means if anything goes wrong, I must spend time doing these things plus more. But if I spend 5 days a week working 7 hours a day that may not be possible. Or affordable.
As a result, my wife has life insurance where the proceeds can be used for the extra costs that would be incurred because she is not there.
Well, that’s the theory but I am constantly checking carsales.com.au for my next Aston Martin should I get my hands on the proceeds. And she wants to buy an entire Jimmy Choo Shop with what she would get her hands on. Kids? What kids?
Seriously, spend 1 hour this week to sort your insurances out. It could be the best hour of your life. Although at the time it will not seem that way your family will thank you for it. And so will I.