Help Me Choose –
Life Insurance – Helpful Tips
- Insuring for life’s traumas
- Household debt is at record levels, yet 5 out of 6 Australians don’t protect their income*
1. Insuring for life’s traumas
It’s not something people often do, but imagine the costs if you suffered a major medical trauma, such as a heart attack, stroke or cancer. Apart from hefty medical costs, there’d be the loss of income from not being able to work. On top of that, a serious illness might cause you to rethink your lifestyle. Perhaps you’d want to pay off debts, move house or take an extended holiday to recuperate.
“People generally like to remain self-sufficient when it comes to their health and finances, but savings and investments alone may not cover all the costs resulting from a major medical trauma,” says Justin Hanka of Help Me Choose. “Relieving emotional and financial stress and creating a better lifestyle can cost a lot of money.”
The most efficient answer in these situations is trauma insurance, a simple insurance plan that pays you a lump sum if you are diagnosed with a specified medical condition. “You can spend your trauma insurance payout however you want to help you recover or change your lifestyle,” says Justin. Hanka says that many of his clients say they would use the money to stop working and set themselves up in a debt-free, worry-free lifestyle. “Trauma insurance creates choices for people, which means less stress and better circumstances for recovery,” he says.
As with any insurance, buying trauma insurance is a case of buyer beware. There are many products on the market offering a wide variety of options in terms of the medical conditions they cover and the criteria they set for claims.
“Read the fine print carefully and preferably get some assistance when deciding which is the right policy for you,” says Hanka. “It’s easy to pay too much by selecting a policy that exceeds your requirements, or to go for something too cheap that doesn’t fulfil your needs.” As one example, Hanka says a person might have a policy that covers skin cancer, which they assume would pay them on diagnosis of the condition. However, they may not have closely examined the criteria required to satisfy claim conditions, such as the depth of cancer needed for a successful claim.
A financial adviser can help you decide whether you would benefit from trauma insurance or can review an existing policy to ensure it is suitable for your current situation.
2. Household debt is at record levels, yet 5 out of 6 Australians don’t protect their income*
It’s a scary statistic that household debt as a proportion of household disposable income has risen from 35% in 1977 to almost 160% in 2008.*
Rising debt levels are generally manageable provided asset prices continue rising, but things can deteriorate if asset prices falter, as seen recently in the United States. Other significant risks to a household’s ability to service debt include increases in interest rates and falls in income levels.
In an income survey commissioned by the Commonwealth Bank **, people were asked how they would manage if they lost their income for three months. Here’s what they said:
- 31% would rely mainly on their savings
- 21% would rely on government welfare
- 20% would rely on family.
At a stretch, most people could make do for three months – but what if you were out of work for longer?
“Most Australians understand the benefits of home and car insurance, but we’re reluctant to insure our income against illness or injury,” says Justin Hanka of Help Me Choose. “By ignoring this, people are inadvertently placing their families and lifestyles at significant risk.”
If a couple who both worked full time and had two children suddenly had to survive on one salary, this would have a significant impact on their ability to meet mortgage repayments and other daily expenses.
Justin stresses the importance of people planning ahead to protect their family against sudden financial hardship. “Bills don’t disappear because we become ill or cannot work,” he says. “Mortgage repayments, school fees, and basics like groceries and petrol still need to be paid.”
Income protection insurance is one way to help safeguard your financial situation against a crisis or illness. It pays a monthly amount until you return to work. According to Justin, today’s income protection policies are less expensive and have more extras and flexibility than those of earlier years. He says income protection cover may be worth another look if you’ve decided against it before, particularly if you have significant debt levels.
With income protection insurance:
- premiums are generally tax-deductible
- most policies pay a benefit up to 75% of an individual’s salary
- payments can continue up to age 65.
A financial adviser can help you decide whether you would benefit from income protection insurance, or can review an existing policy to ensure it is suitable for your current situation.
* Source: RBA Bulletin statistics Table B21, March 2008.
** Source: ACNielsen Omnibus Income Report, commissioned by Commonwealth Bank of Australia, February 2006.
The contents of this website should not be considered as being either general or personal advice on life insurance as your personal needs or financial situation have not been taken into consideration. You should consider the appropriateness of this information in light of your personal circumstances before taking any action to acquire any life insurance product.
You should carefully read the Financial Services Guide provided by any third party provider of insurance and the Product Disclosure Statement pertaining to any relevant products being recommended.