Matching the right insurance policy with your needs is crucial when it comes to securing you and your family's financial future.
Insurance is available for almost anything, from insuring your brand new car to the family pet, but in terms of protecting your financial future there are a handful of different types you need to be aware of.
The real key to getting peace of mind is to understand exactly what situation each type of insurance covers and which ones you need to have for your particular circumstances.
Life insurance
This is a lump sum paid if you die.
Who needs it?
This one is simple; just ask yourself, if you died, what financial shape would your family and loved ones be left in? Could they pay the mortgage, for instance? If you have financial dependents, the chances are, you need life insurance.
Total and permanent disability (TPD)
Basically, this is a lump sum paid if you suffer an illness or an injury that means you can no longer work.
Who needs it?
Another simple question - if you can't work, how would you survive financially? After all the household bills and cost of living won't go away. Not only that, but could you pay for long-term medical rehabilitation and care, including modifications you might need to your home, and still maintain a good lifestyle? If the answers are no, then you may need to consider TPD insurance.
Income protection
This is a monthly payment based on a percentage of your current salary paid to you if you are unable to work due to being temporarily disabled through an illness or an accident. If you fully recover and return to work, the payments stop. If you are permanently unable to work, your monthly payments will continue for no longer than the benefit period provided for in your policy.
Who needs it?
If you don't have the funds to survive without work for a long period of time, you need to protect your income. A lot of people think Workers Compensation will cover them, but remember it generally only pays out in the event of injury at work. Remember that, for many of us, our ability to work and earn an income is likely to be our greatest financial asset so it makes good sense to protect it.
Trauma insurance
This is a lump sum payment made if you are diagnosed with one of the specified trauma conditions in a pre-determined list of critical illnesses or injuries. The aim is to provide a benefit to help you cover medical and rehabilitation costs and assist with any lifestyle or employment changes.
Who needs it?
Trauma insurance fills in the gap between life, TPD and income protection insurance. You may suffer a trauma that puts you out of work and puts your family in financial stress over your treatment. However, the trauma may not put you out of work for long enough to trigger your income protection or TPD insurance. Trauma insurance also helps make sure your illness or injury doesn't have a long-term impact on your finances.
Insure through super and save
Remember, some types of insurance are often accessible through your superannuation fund, which can be more cost effective.
Premiums for life and total and permanent disability insurance are generally higher through a personally-owned policy because they do not benefit from the group wholesale rates available to large superannuation funds.
Also, when insurance is taken-out through your superannuation fund, premiums can be more tax effective if you pay for them out of concessionally-taxed superannuation contributions (money taxed at 15%, not your marginal tax rate). However, you need to bear in mind that an insurance benefit paid through superannuation will be subject to satisfying a condition of release under superannuation legislation.
We recommend you speak to a financial adviser to discuss options relating to the different types of insurance and the benefit in buying insurance offered inside and outside superannuation. You can also speak to your superannuation fund to find out what type of insurance you may already have through your super fund, or what it available to you.
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The information contained in this document is based on the understanding Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468 has of the relevant Australian laws as at 8 August 2011. This document is not advice and is intended to provide general information only. It does not take into account your individual needs, objectives or personal circumstances. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. Product Disclosure Statements (PDS) for products offered by Colonial First State are available from colonialfirststate.com.au or by contacting us on 13 13 36. You should read the relevant PDS and consider whether the product is right for you. Past performance and awards is no indication of future performance.
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