Understanding TPD, income, trauma and life insurance

Let's face facts. We're all going to die some day.

While we may hope that day is a long way off, the reality is that accidents happen and people get sick, so sometimes the day comes sooner than we expect.

You need to ask yourself, if that does happen how will your family cope financially?

Why do you need life insurance?

"If you have dependants, then life insurance is important as that ensures they have a better chance of being able to survive financially," says Susan Jackson, executive director of the Women's Financial Network.

"Money won't replace you but it does help to make life a bit easier."

Damien Mu, general manager, life insurance, for AIA Australia, agrees.

"Life insurance is an important component for the overall financial protection of your family," he says.

Yet life insurance is a topic most people don't want to think about - let alone talk about - and it is often put in the too-hard basket.

"When I find clients trying to duck the conversation, I use a very simple technique of asking one of them to pretend they are now deceased and then I ask the other person what they now want to do with their finances given the death of the other," says Jackson.

"Invariably, if there is insufficient funds, the remaining person starts to talk about having to sell the home, take kids out of school ...

"The pretending deceased partner usually starts to interrupt and make suggestions but I remind them they are no longer part of this family and cannot therefore contribute to the discussion. It's always amazing how quickly they are then extremely happy to start talking about how they can best protect their family in the future."

This is definitely an exercise worth trying.

Is life insurance through superannuation enough?

A common misconception is that you have life insurance as part of your super fund so you don't have to worry about it. But is it is really enough?

It's worth contacting your super fund to find out the level of life insurance you already have.

Holly Dorber, senior insurance policy manager at the Financial Services Council, says 95% of Australians don't have the right level of insurance.

How much life insurance do you need?

So how do you work out how much you need? Jackson says the amount required will depend on your circumstances, but usually you want enough to pay out any debt, cover funeral costs and ensure the family has sufficient cash flow.

"The best way to work is to look at what funds your family would need if your salary or wage was suddenly gone - how would they pay the mortgage, household bills, future education, etc," she says. Mu says it's important to think about your future expenses and not just your immediate debt.

The general rule of thumb is seven to 10 times your annual salary, says Dorber, who is also campaign manager at Lifewise.

That said, even if you don't earn an income - for example, you're a stay-at-home mum - you should still have life insurance. Dorber points to the calculator on the Lifewise website, www.lifewise.org.au, to help you work out how much you need. There are also other online calculators available.

AIA's Mu says a financial adviser can help you work out the right level of cover or you can contact your super fund, which will have tools that can help.

How to choose a life insurance policy

If you're confident about how much cover you need, it is time to look for a policy. Life insurance may be fairly straightforward in that a lump sum will be paid to the beneficiaries when you die, but there is also a number of issues to think about when comparing policies. Find out if there is a terminal illness benefit.

This will mean if you are diagnosed with a terminal illness and given less than 12 months to live, you can apply to have your benefit paid to you in advance, rather than when you die.

You may also want to check if there is an advance payment option. It can take a while for your family to receive the lump- sum payment but, if the insurer offers advance payments, it will pay an amount - usually up to $10,000 - to cover funeral expenses. You'll just need to present the death certificate.

"Customers should never forget to look at the exclusion list before purchasing their policy," says Canstar financial analyst Joshua Zenas.

"Policies may have exclusions based on the customer's occupation - for example, if you regularly work at heights or underground. Some policies exclude recreational sporting activities, like motor sport and hunting."

Another common exclusion is suicide, although some insurers may still cover for this but apply a waiting period.

Are you covered for pre-existing conditions?

You also need to look at how the insurer treats pre-existing conditions.

"Usually companies exclude any pre-existing conditions; sometimes they have a time-period exclusion based on the condition. Sometimes they underwrite and offer you cover," says Zenas.

"If you have a pre-existing condition, call the company before you get the policy because you don't want to find out you are not covered at claim time."

Mu agrees, saying it's important to know what it will mean for your individual circumstances.

Do all your homework. "Always read the product disclosure statement before making a purchase," says Dorber. You should also make sure the policy is backed by a credible insurer, says Mu.

How to buy life insurance

You have a number of options when it comes to purchasing cover.

"Often the easiest and most cost-effective way to put some insurance into place is via your super fund, as most funds offer low-cost comprehensive insurance cover and the cost of the cover comes out of the value of your super," says Jackson.

"This can be a good solution when the household budget just won't stretch to insurance cover but you know that you do need to have some." Even if you already have cover you can buy extra "units".

The other option is to go through a financial adviser.

"You'll generally get a more comprehensive assessment of your needs and what level of cover you need," says Mu. The adviser will also have a good understanding of what is on the market and what to look for, he adds.

You can also go direct to the insurer or through comparison sites such as iselect.com.au, lifebroker.com.au and choosi.com.au. While this gives you choice, says Mu, you miss out on getting advice.

"There is a perception that life insurance is costly, but how do you put a value on your own life?" says Mu. Life insurance may be more affordable than you think. Canstar's website has comparisons for both direct life insurance and insurance bought through a broker.

How to avoid overpaying for life insurance

You don't want to pay any more than you have to, so there are a number of ways to save on premiums. The simplest way is to shop around and compare premiums. You can use a planner or visit the comparison sites mentioned earlier. "Look at your super fund, because that may be cheaper," says Mu. Just make sure you are comparing like with like.

"Get cover in place when you're younger and healthier, as you may get a better rate and this will pay off in the long run," says Mu.

You should also review your lifestyle. Simple things such as quitting smoking can help you save on insurance.

Some companies offer healthy-living discounts. AIA, for example, offers a lifestyle advantage benefit, which gives a 10% discount if you meet certain criteria. Factors considered include your BMI, smoking and drinking habits, driving record and participation in high-risk sports.

Remaining loyal can also pay. "If you remain with the same insurer, the insurer might offer a loyalty refund of your premiums," says Zenas. You could also get a multi-policy discount if you bundle a number of policies with the one provider says Mu.

What is income protection insurance?

Everyone who is reliant on their income should have income protection insurance, which provides replacement income in the event of your being unable to work due to sickness, accident or injury, says Susan Jackson, from the Women's Financial Network.

You're generally covered for a maximum of 75% of your salary, but you may have the ability to add an extra 10% as a contribution to super, says AIA's Damien Mu. Payments are made as income, not a lump sum. The premium for income protection is tax-deductible.

Issues to consider include:

• The waiting period. Common options are 30, 60 or 90 days or two years. The longer the wait the cheaper the premium is likely to be.
• The benefit period. Generally you can choose among two years, five years or to age 65.
• Will the benefit amount be indexed for inflation?
• Are you covered for "any occupation" or "own occupation"? See TPD for more detail.

What is TPD cover?

Total and permanent and permanent disability insurance pays you if you suffer an injury that means you can never work again. It is usually an optional extra on your life insurance.

Temporary disabilities or illnesses aren't covered. The main question you need to ask is whether you're covered for "any occupation" or "own occupation"? With "any occupation" you might not be paid if you can still work.

For example, a surgeon who hurt his hand may not be covered under "any occupation" because he can still perform other jobs. You should also find out if your life cover will become void if you make a claim on your TPD cover.

Do you need trauma insurance?

Trauma insurance will pay you a lump sum if you suffer a serious medical condition, such as a heart attack, cancer or loss of a limb.

You might not die from these conditions but they will have a financial impact and so extra cash could help during this time, says Jackson.

"This type of insurance can be good for those who are ineligible for income protection insurance such as stay-at-home mums," she says.

It can also be used in conjunction with income protection to bridge the 25% gap. Find out what conditions are covered - the fewer the conditions the cheaper the cover. You may also opt for a policy with a buyback option, so if you are paid for a claim you can repurchase cover.

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