How to make insurance work for you

How to make insurance work for you

How to make insurance work for you 150 150 James Williams

The four main types of personal insurance we deal with are life insurance, total and permanent disability or TPD insurance, trauma insurance, also known as critical illness, and income protection insurance. Each has a different function if you’re injured, ill or unable to work for either a period of time or for the rest of your life. But it’s unusual for someone to be insured for all of these types of personal insurance. The challenge is working out what you need to protect yourself and your family.

There are four types of personal insurance

Life insurance pays a lump sum to your family or beneficiaries if you pass away. But not many people realise that it can also pay you a lump sum if you’re diagnosed with a terminal illness.

TPD insurance pays out if you’re classified as being unable to work again.

Trauma insurance can pay a lump sum if you’re diagnosed with a defined medical event. There are more than a hundred defined medical events that include cancers, stroke and heart problems. This is the most commonly claimed insurance, I believe almost one in two people suffer a trauma event in their lifetime. I’ve had clients who have been able to call on trauma insurance later on in their working life and that’s enabled them to step away from work for an extended period or even bring forward their retirement.

Income protection insurance provides a regular monthly payment when you’ve been off work for a defined period of time. It usually pays up to 75% of your pre-disability salary and can pay you until you’re 65. So if you never go back to work because of an injury or illness, you know that your income is going to continue to come in and your family is going to be supported.

Unfortunately, a common issue in today’s world is mental health and this can prevent people from being able to return to work soon after a trauma. I’ve seen income protection insurance allow people to concentrate on their recovery without having to worry about money.

All four types of insurance work together

While each type of insurance stands on their own, they also work together well. For example, I recall a client who suffered a very serious injury. This prevented them from being able to run the business they’d been building up for many years. Fortunately, they had taken out income protection insurance and were able to claim it. This enabled them to receive a monthly income and helped them pay someone to perform the role they were doing so their business could continue. This was particularly important for them as it was a family business, and something they wanted to be able to pass on to their children.

After a few years, it looked like they were unlikely to recover from their injuries. At this point TPD insurance paid them an additional lump sum. This lump sum set them up for retirement. They didn’t have to worry about pulling any additional money from their business and could pass the business onto their family knowing that they would be set up for life.

This gave my client peace of mind and complete certainty as they headed into retirement.

Working out what insurance you need

One of the biggest mistakes I see people make is misunderstanding what they’re eligible to receive from their insurance. For example, some people don’t understand that income protection only pays if you’re still here, it doesn’t pay out to your family if you pass away. There’s also confusion around how trauma insurance interacts with TPD, for example. Many people don’t understand the level of cover, as well as the type of cover that they need.

Many have a default level of cover through their superannuation, this is usually life insurance and TPD but may include some level of income protection as well. Unfortunately, these are often insufficient to support people and give them what they need when something happens.

While all four types of personal insurance work together, you don’t want to have too much of one and pay a premium that’s not needed. This is where good advice is crucial.

Everyone is different and the insurance you need will depend on your personal situation. That’s why it often helps to sit down with a specialist and discuss what insurance you currently have, what you might need and where the gaps are. You also need to be careful about making changes too hastily as each insurance isn’t necessarily available to everyone. It can depend on your health and your current situation. So you want to make sure that you know what you need and that the insurance policies you have do complement each other.

For example, if you suffer a medical event like a stroke. You could claim a critical illness or trauma payment to help cover your short-term medical bills. This would help cover that gap between what private health insurance gives you versus what the hospitals actually charge. You may also want to get medical treatment overseas or specialised treatment that isn’t covered by any health insurer.

If however you’re unable to go back to work, then income protection insurance may kick in. That could pay you an amount up to 75% of your monthly salary until you’re able to go back to work. But if you’re not able to go back to work, then you may also be eligible for a TPD payout as well. Often a TPD payment can help you pay off your home loan or maybe renovate the house to help you have a better life. If unfortunately you pass away, then life insurance is there as well.

While you never want to have the worst-case scenario, unfortunately it does happen. But it’s good to know that you’ve got the cover you need and are able to call upon it.

James Williams is an Executive Advisor at Viridian Advisory

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