Life insurance
Posted: Tue Sep 15, 2009 7:59 pmThis is quite a long post – sorry but it's not an easy topic to cover. Also, what I have written below is to be considered “general advice” and does not take into consideration your personal requirements or appropriateness.
After having the question posed last week about income protection insurance I thought I'd write up a little bit of information about 2 other insurance covers – Life cover and Total & Permanent Disability cover.
With the tough economic times it's not uncommon for insurance to become one of the first items cut from the family budget. Whether it's life insurance, total and permanent disability, car or home and contents – insurance can seem like a complete waste of money – and it is right up until you need to claim.
One of the most frequent questions I used to get asked is – how much do I need? I'm going to give a breakdown as to how I used to work out the appropriate amount for my clients – but remember – as a financial planer my job was to present a worse case scenario to my clients. This was to cover my arse should a worse case scenario actually take place. If my recommendation was not sufficient I was open to legal action (am still am for another 7 years – yay).
How I calculated life cover:
1.Cover all debts – mortgage, credit cards, personal loans. This was to ensure that the remaining family members were not burdened with any debt while retaining a family home.
2.Cover funeral costs – typically $15,000
3.Cover any replacement income – most of my clients were couples. Should the main income provider pass away I would allow an amount of replacement income to be available – as a rule of thumb, 50% of the annual wage until the youngest child turned 21.
4.Education costs – covering the cost, per child, for education to age 21. This was determined during a discussion with the client – private or public school, university or other further education etc. As a rough guide I'd recommend a minimum of $10,000 per child for 5-6 years.
5.Special bequests – some clients wanted to leave sums of money to a variety of organisations, from their church to animal welfare.
6.An emergency fund of $20,000 was usually recommended as well – for emergencies which could not be foreseen.
7.You may also want to consider capital purchases such as home repairs / renovations or replacement vehicle costs every 3-4 years. This really depends on you and your family requirements.
For an average couple with a mortgage the life cover could be between $1m and $2m (remember that age also plays a part in this – will come back to this later)
For Total and Permanent Disability cover the calculations would be similar however it is unfortunately way more expensive to live than die – especially in this kind of situation.
1.Cover all debts – same as life cover. If you cannot work and earn a living you still need a place to live and more money to live on.
2.Replace income – typically I'd team this cover up with Income Protection or Temporary Salary Continuance cover to provide 75% of your usual income to age 65.
3.If IP/TSC wasn't available I'd manually calculate it an build it into the TPD policy.
4.Cover for medical expenses – a minimum I'd recommend is $250,000 – usually I'd suggest $500,000. Nurses, medical equipment, modifications to the home or car etc are not cheap.
5.Education expenses for any children – same as life cover.
6.Emergency fund – same as life cover.
7.Again – capital purchases as with life cover.
These policies, combined with IP/TSC cover most of the life events which come along. Both of these policies (and TSC) can be held within a superannuation fund. This makes them more affordable as the premium comes from your fund (your fund manager usually gets a discount on the premiums because of the baulk amounts of cover they provide their members). To cover the premium and ensure your super is growing you may need to make additional contributions – either via salary sacrifice (very tax effective) or via personal contributions (which may be tax deductible – check with your accountant).
With either insurance age plays a large part. My older clients were often in a position where their cover was lower because they had acquired enough assets through their life to be able to provide a level of self-insurance.
Younger couples just starting out would have a larger amount of cover – simply because they may not have the large asset base to work from.
You may be required to have a medical examination from your GP for either policy along with additional pathology tests if required.
For life claims the process is usually fast and relatively easy. For a TPD claim the average time to process it is 18 to 30 months – enough time to go broke and thus the recommendation for IP/TSC to keep the wolf just scratching at the door rather than taking the whole building. TPD claims are always difficult and require large amounts of patience to see through. I'm not expecting my claim to be settled within a 24 month period.
I've not quoted exact figures here in relation to how much is the right amount – just what to think about when working out your needs. Also remember – my job was to SELL INSURANCE! Never lose sight of this fact – the person you see is doing just that – SELLING. Always read the fine print. Ask for a Product Disclosure Statement BEFORE signing anything and have it explained what is covered, what is excluded etc.
For those who do not believe in superannuation – for the majority of Australians you have it paid by your employer and you cannot access it until you age 60/65 – make use of it's cover. For self-employed – it's still available even within a company structure. For those with self-managed superannuation – discuss with your accountant or financial planner who set it up.
After having the question posed last week about income protection insurance I thought I'd write up a little bit of information about 2 other insurance covers – Life cover and Total & Permanent Disability cover.
With the tough economic times it's not uncommon for insurance to become one of the first items cut from the family budget. Whether it's life insurance, total and permanent disability, car or home and contents – insurance can seem like a complete waste of money – and it is right up until you need to claim.
One of the most frequent questions I used to get asked is – how much do I need? I'm going to give a breakdown as to how I used to work out the appropriate amount for my clients – but remember – as a financial planer my job was to present a worse case scenario to my clients. This was to cover my arse should a worse case scenario actually take place. If my recommendation was not sufficient I was open to legal action (am still am for another 7 years – yay).
How I calculated life cover:
1.Cover all debts – mortgage, credit cards, personal loans. This was to ensure that the remaining family members were not burdened with any debt while retaining a family home.
2.Cover funeral costs – typically $15,000
3.Cover any replacement income – most of my clients were couples. Should the main income provider pass away I would allow an amount of replacement income to be available – as a rule of thumb, 50% of the annual wage until the youngest child turned 21.
4.Education costs – covering the cost, per child, for education to age 21. This was determined during a discussion with the client – private or public school, university or other further education etc. As a rough guide I'd recommend a minimum of $10,000 per child for 5-6 years.
5.Special bequests – some clients wanted to leave sums of money to a variety of organisations, from their church to animal welfare.
6.An emergency fund of $20,000 was usually recommended as well – for emergencies which could not be foreseen.
7.You may also want to consider capital purchases such as home repairs / renovations or replacement vehicle costs every 3-4 years. This really depends on you and your family requirements.
For an average couple with a mortgage the life cover could be between $1m and $2m (remember that age also plays a part in this – will come back to this later)
For Total and Permanent Disability cover the calculations would be similar however it is unfortunately way more expensive to live than die – especially in this kind of situation.
1.Cover all debts – same as life cover. If you cannot work and earn a living you still need a place to live and more money to live on.
2.Replace income – typically I'd team this cover up with Income Protection or Temporary Salary Continuance cover to provide 75% of your usual income to age 65.
3.If IP/TSC wasn't available I'd manually calculate it an build it into the TPD policy.
4.Cover for medical expenses – a minimum I'd recommend is $250,000 – usually I'd suggest $500,000. Nurses, medical equipment, modifications to the home or car etc are not cheap.
5.Education expenses for any children – same as life cover.
6.Emergency fund – same as life cover.
7.Again – capital purchases as with life cover.
These policies, combined with IP/TSC cover most of the life events which come along. Both of these policies (and TSC) can be held within a superannuation fund. This makes them more affordable as the premium comes from your fund (your fund manager usually gets a discount on the premiums because of the baulk amounts of cover they provide their members). To cover the premium and ensure your super is growing you may need to make additional contributions – either via salary sacrifice (very tax effective) or via personal contributions (which may be tax deductible – check with your accountant).
With either insurance age plays a large part. My older clients were often in a position where their cover was lower because they had acquired enough assets through their life to be able to provide a level of self-insurance.
Younger couples just starting out would have a larger amount of cover – simply because they may not have the large asset base to work from.
You may be required to have a medical examination from your GP for either policy along with additional pathology tests if required.
For life claims the process is usually fast and relatively easy. For a TPD claim the average time to process it is 18 to 30 months – enough time to go broke and thus the recommendation for IP/TSC to keep the wolf just scratching at the door rather than taking the whole building. TPD claims are always difficult and require large amounts of patience to see through. I'm not expecting my claim to be settled within a 24 month period.
I've not quoted exact figures here in relation to how much is the right amount – just what to think about when working out your needs. Also remember – my job was to SELL INSURANCE! Never lose sight of this fact – the person you see is doing just that – SELLING. Always read the fine print. Ask for a Product Disclosure Statement BEFORE signing anything and have it explained what is covered, what is excluded etc.
For those who do not believe in superannuation – for the majority of Australians you have it paid by your employer and you cannot access it until you age 60/65 – make use of it's cover. For self-employed – it's still available even within a company structure. For those with self-managed superannuation – discuss with your accountant or financial planner who set it up.
