The common belief that “it won’t happen to me” results in many people having a sound plan for wealth creation but not for protecting the very thing that generates wealth, themselves. When your in your 40s, you may still be paying off debt and have dependents to look after - insurance can be critical.
Life insurance pays a lump sum to the deceased’s beneficiaries or estate upon death. Beneficiaries can use the lump sum to repay debt, pay for children’s education or long term care, or any other purpose.
Life insurance policies which are owned directly generally have the following features:
- Premiums are usually not tax-deductible.
- In the event of death, the lump sum is generally paid tax-free to the nominated beneficiary.
- There are generally no restrictions on who can be nominated as beneficiary.
- If a beneficiary is nominated, proceeds are paid direct to that person and bypass the estate.
Total and permanent disability (TPD) insurance
TPD insurance pays a lump sum if the person suffers an illness or injury which totally and permanently prevents them from working again. TPD insurance can provide cover based on the person’s own occupation or any occupation. A
person working in a specialist occupation may gain greater protection by choosing own occupation cover.
Premiums on TPD policies which are owned directly are generally not tax-deductible. In the event of a claim, the proceeds will be paid direct to the insured person or their nominated beneficiary. The proceeds are generally only taxable if paid direct to someone other than the insured person or their near relative.
Income protection, or salary continuance, provides a regular income if a person is unable to work due to sickness or injury. This type of insurance can be particularly important for a person who has loans or geared investments where the loan repayments are reliant on the person’s income.
Income protection provides a regular income during the period the person can’t work. A waiting period will usually apply before payments commence. A person can generally choose a waiting period between 14 days and two years. A longer waiting period will usually result in a lower premium.
A policy will usually pay up to 75% of income. If the policy covers an ‘agreed value’, the monthly payment is stated in the policy and this is the amount that will be paid if a claim is approved. ‘Indemnity value’ means the amount of the monthly payment will be determined at the time of making a claim, based on 75% of the income earned in the 12 months prior to the claim.
The cost of income protection premiums are generally tax deductible, which helps to reduce the effective cost of the insurance. In the event of a claim, the monthly payments are taxable income.
Trauma (or critical illness) insurance provides a lump sum upon diagnosis of a specified illness or injury.
Trauma insurance is designed to provide money to help the insured person recover financially after a trauma or crisis, such as a heart attack, stroke, cancer or other life threatening illness.
The payment is made regardless of whether the person is able to return to work and is designed to relieve financial pressure at a time of great stress. Premiums for trauma insurance cover are generally not tax deductible. In the event of a claim, the proceeds are generally paid tax-free.
Amount of cover
In determining the amount of insurance a person needs, consideration needs to be given to the potential loss that could result from various risks. Decisions need to be made as to what risks can be retained, what risks can be avoided and what risks must be transferred. The amount and types of cover that a person needs will depend on their circumstances and objectives. It might include factors such as marital status, whether the person has children, their budget, how much they want to provide for dependents and their level of assets and debt.