06 Sep Efficient insurance: how to be smart with your cover
A lot of people have their life and disability insurance all over the place – a bit through super, some through another super fund they didn’t realise they had from that job 10 years ago, and a policy they took out through AMP 20 years ago because their parents made them. It’s not efficient in terms of fees and charges or in how well you’re protected in the event of sickness or injury.
So what is an efficient insurance portfolio? It starts with understanding how your policies are meant to interact and offset each other. It’s not about having the most insurance, its about structuring it wisely.
4 types of personal insurance
- Life Cover (death)
- Total and Permanent Disability Cover (sickness/accident/injury – long term)
- Trauma/Critical Illness Cover (sickness/accident/injury – shorter term/specific)
- Income Protection cover (sickness/accident/injury – short or long term)
In my experience there is rarely one type of cover that offers adequate protection. Let me explain:
- Death insurance sits out on it’s own because it covers one event – death. It’s pretty final.
- There are three types of disability cover. They all have separate triggers and they all work independently to achieve different outcomes, but together they work extremely well to protect you no matter what comes your way.
- Income Protection protects your income (surprise, surprise!). If you rely on your income, and don’t have passive income of at least $100K coming in, then you need income protection to pay the bills, the rent, the mortgage, the school fees – the everyday living costs.
- Thing is, Income Protection pays you in a drip feed. So if you’ve got any big expenses it’s likely you won’t have the cash asset necessary to pay it (medical expenses for example).
- This is where the two other disability covers Total & Permanent Disability and Trauma cover come in, because they are the lump sum payments designed to compliment Income Protection.
- Total & Permanent Disability cover (TPD). It will pay out in the event you cannot work ever again.You’ll need a reasonable lump sum to set you up for the rest of your life – to pay out debt, provide money to provide for you long term etc. Income Protection will replace your everyday money, this pays your big expenses and set-up costs. Did you know that a wheelchair accessible vehicle in Australia is around $100K. Have you got the cash laying around for that?
- Trauma/Critical Illness cover. Plugs the gap between Income Protection and the long-term nature of TPD cover by covering the short-term base. Critical Illness cover recognises you’ve been diagnosed with something bad like cancer but has faith that with a cash injection you can do what you need to do to recover – this policy is about fast action and positive vibes!
Case Study – the policy parameters
Let’s say you have seen an adviser, set up a proper protection portfolio and your protection is as follows:
- $1,000,000 Life insurance
- $750,000 TPD cover
- $200,000 Trauma/Critical Illness Cover
- $6,250 per month Income Protection (90 day waiting period, age 70 benefit period).
Case Study – the experience
Let’s say you were diagnosed with cancer 5 years ago:
- The first policy likely to trigger is the Critical Illness, as it’s paid out in the event of diagnosis of a listed condition. $200K drops into your bank account so you can get on with the serious business of recovery.
- It becomes clear you’re going to need 12 months off work for treatment, so after your 90 day waiting period your Income Protection kicks in to drip-feed $6,250 into your bank account every month so you can continue to pay for all the everyday expenses and not have to worry about money.
- At the 12 month mark of being off work the cancer has retreated and you go back to work.
- Two years later the cancer comes back. It’s spread this time. You go back onto Income Protection claim (Whaaaaaaaaat? Didn’t know you could do this? Yes. Yes you can.).
- It then becomes pretty clear that you can’t work at all. You’re an engineer for a civil construction firm and you can’t concentrate on the calculations required when your head is so messed up from the aggressive chemo and radiotherapy you need. You are declared Totally and Permanently Disabled and make a successful TPD claim. $750,000 is dumped into your bank account and you pay off the house and spend time going on trips with your family and doing the things you’ve always wanted to do like spend your time sailing.
- Two years later sadly the cancer overwhelms you and you pass away, leaving your life insurance to your family.
The benefits of an efficient insurance portfolio
The above scenario sadly happened to a client of mine. See, the truth is that having an efficient and properly structured insurance portfolio doesn’t mean you’ll get better. But I’ll tell you what it did for the client in the example above:
- Paid off all the debts so the client and their family didn’t have to stress about the bank coming for their house
- Repaid their investment property so there was some passive income on top of Income Protection so they didn’t have to worry about how they were going to live
- Could afford their everyday living expenses so they didn’t have to worry about how they were going to live
- Able to afford the best and most comfortable treatment such as home care so they didn’t have to worry about scrimping and saving to get even the most basic care and the client could work on his recovery with dignity
- Flew overseas first class to see friends
- The client could leave his surviving spouse and children with no debt, no financial mess to recover from and the best chance at recovering themselves from a long and draining experience.
That’s what an efficient insurance portfolio is about. Structuring policies so they bounce off each other and so you’re not paying more than you have to in order to achieve the main goal of personal insurance: peace of mind.