Recent happenings, both here in Australia and abroad, have underscored the unpredictability of life. These events prompt us to ponder our place in the world and the ripple effects our absence might create.
Recent happenings, both here in Australia and abroad, have underscored the unpredictability of life. These events prompt us to ponder our place in the world and the ripple effects our absence might create. While these questions often arise from a spiritual or practical standpoint, they also have significant financial implications.
When it comes to financial planning, a well-rounded strategy should aim to grow your portfolio while also safeguarding it from potential risks. To put it in terms of footy, a solid game plan should include both a strong offence (growth) and a sturdy defence (risk protection strategy).
Risk Minimisation Strategies
There are numerous ways to mitigate risk in your financial plan, such as diversifying your investments, understanding your risk profile, maintaining liquidity, and keeping a safety net of cash in the bank. However, today, I’d like to zero in on one particular aspect: personal insurance cover.
In Australia, there are four main types of personal insurance cover:
When considering personal insurance cover, there are a few key questions you should be asking:
How Much Cover Do You Need?
The amount of cover you need will vary significantly from person to person. A young individual with no dependents will require a different level of cover compared to a middle-aged parent with three young children. It’s crucial to consider your personal situation to ensure you have the most appropriate protection in place. Factors such as debt levels, income, assets, and passive income should all be considered when determining how much personal insurance cover you need.
Who Are You Protecting?
This question often gets overlooked when it comes to personal insurance cover. Surprisingly, eight times out of ten, the focus is actually on protecting yourself rather than your dependents. It’s natural for a young parent to want to ensure that their kids are looked after if something was to happen to them. But at the end of the day, the biggest risk to your financial plan is something happening to you. Therefore, we need strategies to protect you, your income, and your financial assets in the event that you are unable to work due to injury or illness.
How Should Your Personal Insurance Cover Be Structured?
Personal insurance cover can be structured through either your superannuation or in your personal name. Business owners can structure it through their company. Each policy has different pros and cons. For example, if life insurance is held in superannuation and is paid to dependent beneficiaries such as a spouse or child under the age of 18, there are no tax consequences associated with this. However, if it’s paid to non-dependent beneficiaries such as a sibling or a child over the age of 18, tax of up to 30% of the payout figure is payable. This can result in a significant and often unexpected tax bill. In contrast, if life insurance is held in your personal name, the payouts would be tax-free regardless of the recipient.
Cost Considerations
As much as we want to be protected for all scenarios, we have to accept that costs are a consideration, particularly for personal insurance cover. Premiums start out relatively cheap for those in their 20s and 30s, begin to increase for people in their 40s, and skyrocket exponentially once you reach age 50. Unfortunately, I’ve seen plenty of examples of people in their late 50s wondering why their superannuation has gone backwards. Often, they’re not aware that they’re paying over $10,000 per annum in personal insurance cover, which has significantly impacted their retirement plans.
Policy Definitions
When it comes to personal insurance cover, you often get what you pay for. Default insurance cover within superannuation, while better than nothing, often has significant shortcomings in definitions, making it harder to make a successful claim. Furthermore, with group cover, those definitions can change at a moment’s notice. Policy definitions are critical, and as much as we want to hold as much cover within superannuation as possible from a cash flow perspective, it does limit your ability to make a successful claim, especially in certain industries.
In conclusion, we all know insurance is expensive until you need to make a claim. Then it becomes very, very cheap. Ensuring that you have the right structure in place will ensure that you continue to build and grow your financial future and not be a financial burden on your dependents in the event something was to happen to you. Every plan requires an offence and a defence, and therefore, you need to have a conversation about your personal insurance cover. Without having a Plan B in place, it can be exceptionally dangerous.
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