Car and home insurance are common priorities, but many people overlook insuring their most valuable asset: their income. Your ability to earn forms the foundation of your lifestyle and supports all your financial plans. Without it, everything from paying off debt to saving for a home or supporting your family could be at risk.
Ensuring your income is protected is crucial for maintaining financial stability and achieving long-term goals and as much as we don’t like to think of the worst, it’s important that you are prepared, just in case.
We can give you many of examples of clients who’ve had unforeseen circumstances rendering them unable to continue to work. Things like, unexpected illness requiring lengthy treatment, accidental injuries on the job, chronic conditions and mental health issues to name a few.
If you’re the primary care giver, losing your income can have severe consequences on your debt repayments, any dependents and ultimately maintaining your lifestyle.
Three types of insurance you need to know about
Understanding the different types of personalinsurance available is crucial for ensuring financial security and peace of mind. Here, we explore three essential types of insurance: income protection, trauma cover, and total and permanent disability (TPD) insurance. Each serves a unique purpose, helping you manage risks and unexpected events that can disrupt your life and finances.
1. Income Protection Insurance
What It Is: Income protection insurance provides financial support if you are unable to work due to sickness or injury. It does not cover situations where you are made redundant or decide to quit your job.
Payment Type: This insurance pays out as a monthly income stream, usually covering up to 70% of your regular income.
Average Cost: As a general rule, basic income protection shouldn’t cost more than 1 to 1.5% of your salary.
Key Considerations:
- Waiting Period: The time before you can start claiming, which can be adjusted to reduce premiums if you have resources like savings, sick leave or annual leave.
- Benefit Period: Ideally, you want to be covered until you’re 65 and can access your super. Shorter benefit periods can leave you vulnerable if you cannot return to work.
2. Trauma Cover
What It Is: Trauma insurance, also known as critical illness insurance, provides a lump sum payment if you are diagnosed with a serious illness such as advanced cancer, a major heart attack, or a stroke.
Payment Type: Lump sum.
Average Payout: Between $100,000 and $500,000.
Key Considerations:
- Trauma cover is paid out regardless of whether you can continue to work during treatment.
- It can help cover high medical costs and other expenses during a critical period.
3. Total and Permanent Disability (TPD) Insurance
What It Is: TPD insurance pays out a lump sum if you become totally and permanently disabled and are unable to work. Depending on the policy, it may cover you if you can’t return to your current occupation or any occupation.
Payment Type: Lump sum.
Average Payout: From $30,000 to millions of dollars.
Key Considerations:
- TPD cover can be funded through your superannuation, which has no direct impact on your cash flow.
- Ensure the cover amount aligns with your financial needs and lifestyle to avoid being underinsured.
How to determine your insurance needs:
Step 1: Analyse Your Finances
Understand what you need to maintain your lifestyle if you can’t work. This includes regular bills, mortgage repayments, groceries, and other necessities.
Step 2: Assess Employer Benefits
Check what benefits your employer provides, such as sick leave, annual leave, and long-service leave. Some insurers require you to use these before claiming income protection insurance.
Step 3: Evaluate Your Cash Buffer
Consider how long you could sustain yourself financially if your income was cut off. Factor in your savings, your partner’s employment and income, as well as other existing insurances.
Step 4: Check Existing Cover
Look at your superannuation to see if you already have income protection insurance. Many products automatically provide this, but the coverage might be insufficient.
Important Considerations:
- Coverage Amount: Ensure the coverage amount matches your income and financial responsibilities.
- Waiting and Benefit Periods: Adjust these periods based on your available resources and long-term financial plans.
Choosing the right insurance cover is essential for protecting your financial future. By understanding and evaluating your needs, you can make informed decisions about income protection, trauma cover, and TPD insurance.
Always consult with financial advisers to tailor your insurance strategy to your specific circumstances and ensure you’re adequately protected against life’s uncertainties.
