Could there be more to life insurance than death?

Every day you work hard to create the best possible lifestyle for you and your loved ones.

This includes many sacrifices to ensure that you can achieve your financial goals like paying down debt, holidays aboard, children’s education and a comfortable retirement.

With life being so busy and with so much focus on achieving these goals we can often be guilty of failing to protect ourselves in the event of a personal disaster.

Now most Australians with a mortgage have put in place their obligatory life insurance to pay off debt should they be the victim of premature death.

But have you considered what would happen if you were seriously injured or so sick that you were permanently unable to work?

This part of life insurance is often overlooked and is just as important for singles as it is for those with partners and families.

Whilst no one can deny the level of emotional stress at the time of a bereavement, inadequate life insurance arrangements with regard to disability can affect the family unit for many years after the onset of the illness or the accident.

If you or your partner survives a major health catastrophe, the regular bills will just keep rolling in, plus there will also be the additional medical and lifestyle bills the result from the medical intervention.

That’s why disability insurance is so important.

The insurance, known as TPD (total and permanent disability), provides a lump sum payment to help you replace lost future earnings. It can also be used to cover other financial commitments like paying debts, covering additional medical expenses and the costs of any long-term care you may require.

It could also help you to make changes to your home to accommodate things like wheelchairs.

What’s horrifying is how often TPD claims occur in Australia and how big the impact is on a person’s life.

In 2016 the insurance industry paid out over $9bn in claims to Australians across the areas of income protection, life, disability and trauma insurance.

One insurer, TAL, in 2016 paid out over $1.4bn with over 60% of claims paid to those who survived and continued to live their lives.

Another insurer, AIA, paid out over $1.1bn in 2016, with over 26% of claims being for Total & Permanently Disability.

Now you might be thinking, ‘what about government support, they pay sickness benefits, don’t they?’, and you would be correct.

 

The government does pay people who are in serious financial distress a benefit if they are sick and/or injured and can’t work.

In fact, as a member of a couple with kids, if your partner’s income is below $45,859 per year and your total assets is below $380,500, for homeowners, the government will pay you a sickness allowance. Based on the current figures, available from here, you could be paid up to $486.50 per fortnight per person for a couple.

That’s only $25,200 per year for both of you, which for most would be a substantial reduction in their standard of living.

It’s worth remembering that to receive this you would have had to sell off virtually all your assets, leaving you with virtually nothing if you want to make changes to your home, fly to see family or replace a vehicle which is no longer appropriate to your needs.

Example: potential impact of a disability on a family

A regular Australian family with two kids and two working parents earning jointly $130,000 per year. One partner suffers a devastating injury which leaves them permanently disabled and unable to work.

As there is a family to take care of, the abled-partner is forced to quit their job to take care of the family and their now disabled partner.

As they rely solely on Sickness Allowance from the government for disability payments, once they have sold down assets in order to meet the assets test, they then could expect their final annual income to drop to around $25,200 a year.

This is an income reduction of up to $104,800 (excluding tax).

The alternative is to take the time to assess the potential financial and lifestyle impact of a serious illness or injury to you or your partner, and put the appropriate cover in place.

Although this can get quite complicated, particularly when trying to determine the lump sum payment required to replace a long-term family income source, the benefits received in the event of the claim are immeasurable.

 

Nick Andrews

Financial Planner