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On this page, you’ll find everything you need to know about personal insurance and how each cover works, the different ways policies can be owned, their tax treatment, and the pros and cons of each ownership structure.
Many people underestimate the importance of personal insurance, which has led to widespread underinsurance in Australia. Consider having enough cover to replace your income and meet essential expenses, so that a personal tragedy doesn’t become a financial one.
Losing a loved one and leaving behind debt obligations can put a significant strain on your surviving family. Additionally, rates of serious conditions such as cancer, stroke and heart attack are rising each year. Covering medical expenses and home modifications can place a significant burden on your finances and the quality of your care and recovery.
You can apply for insurance to cover you in the event of death, temporary or permanent disability, or trauma.
Below we have outlined the main types of cover provided in the Australian personal life insurance market. As you continue reading, we will dive into each cover type and everything you need to know to make an informed decision.
A lump sum payment designed to support your loved ones financially if you pass away.
A lump sum payment if you become permanently disabled and can no longer work.
Regular monthly payments to replace lost income if you're unable to work due to illness or injury.
A lump sum payment to support you after a serious illness or medical event like cancer or stroke.
A lump sum payment to support you if your child suffers a covered illness or medical event.
Financial planning is about protecting your wealth as well as building it. It is easy to think that you won’t get sick or hurt and ignore the need to protect the very thing that generates your wealth: your own health and your ability to work. But if an accident or serious illness does occur, the impacts can be devastating.
Personal risk insurance protects your wealth accumulation strategy by providing money if you are no longer able to earn an income due to disability, trauma or death. The money received can help with medical bills, loan repayments and living expenses.
Your financial plan should include a strategy to minimise risks that could jeopardise both your present and future plans. In simple terms, if you cannot afford to lose something then you should try to protect yourself against that risk. Insurance can provide a cost-effective protection mechanism.
This may take a combination of personal, general and health insurance policies. There are many different aspects to insurance and it is best to tailor a package that suits your needs as well as your budget.
It’s worth remembering that no matter how much expert advice you receive or how well you manage your finances there is always a risk that you could suffer an early death or serious illness or injury. Where that leaves you and your loved ones in the future depends on the wealth protection strategy you have in place. Risks you could face in the future may include:
Life insurance will pay a lump sum to your estate or specified beneficiaries in the event of death or in some cases, on diagnosis of a terminal illness. It is important to understand what features your cover has. Term life insurance is the most common type of insurance cover and is extremely important as part of your financial risk management.
Australian life insurance can be used to pay off your mortgages, car loans and investment loans, and provide an income for dependents, cover funeral expenses and generally assist in maintaining your family’s lifestyle in the event of your death. Having appropriate life insurance can give you peace of mind that your death will lower financial hardship for your loved ones.
Life insurance can ensure that your family will not be burdened by debt and this cover can help protect them from needing to sell assets to cover debts and living expenses. Selling assets upon death can have significant tax implications and transactional costs that could be avoided with appropriate levels of cover.
If you are considering an Australian life insurance policy for you or a loved one, we encourage you to engage with us to assist. We are qualified life insurance advisers and have extensive experience in personal insurance.
Unfortunate things in life can happen which lead to being disabled. Total and Permanent Disablement (TPD) can hinder you from working, conducting daily activities and often requires expensive medical treatment and ongoing care with specialists and other medical professionals.
TPD insurance cover is primarily about providing you with a lump sum if you suffer an illness or injury and are permanently unable to work, care for yourself independently, or experience significant and permanent cognitive impairment.
A TPD insurance definition varies based on various factors including occupation and health eligibility. TPD insurance definitions are typically segmented into “any occupation”, “own occupation” or “home duties” and “ADL” (Activities of Daily Living). They provide conditions upon what deems a person disabled for the purposes of the insurance cover claim and have varying levels of severity.
Every insurance arrangement is unique to the individual given every person has different circumstances, needs for cover and occupations. Occupation definition also depends on ownership structuring, employment and health circumstances. It is highly recommended that you seek professional advice to find an arrangement that suits your needs best.
Any Occupation TPD insurance policies pay a benefit if you are unlikely to be gainfully employed in any business, profession or occupation for which you are reasonably suited by your education, training or experience. This definition is generally less expensive than an ‘own occupation’ TPD policy.
Own Occupation TPD Insurance policies will pay a benefit if you are unlikely to ever be gainfully employed in your own occupation. Own Occupation TPD provides a generous definition as it is specific to your occupation and is particularly suitable for specialist occupations. The premiums for this type of definition are more expensive than other definitions of TPD insurance.
Home duties and ADL definitions of TPD insurance are typically more cost-effective but have less generous definitions, and the criteria to claim focus more on functional ability than on work capacity.
A serious illness or injury can prevent you from working for a period of time and may require expensive medical treatment. Trauma insurance aims to provide a lump sum upon the diagnosis of a specified illness or injury such as life-threatening cancer, stroke or heart attack.
Trauma insurance benefits pay a lump sum that can be used to pay medical expenses and reduce any financial pressure while you focus on recovery. This payment is made regardless of whether you are able to return to work, and is designed to relieve financial pressure at a time when you are under great stress. Critical Illness cover must be paid from personal cash flow and is usually more expensive than other types of covers.
Child Trauma insurance can be added to your policy to cover a seriously ill or injured child. This provides a lump sum to help you cover medical treatment and eases financial worry for parents who may need to take time off work to provide care.
Income Protection insurance aims to minimise the financial impact of sickness or injury by replacing income lost during a prolonged absence from work. A monthly benefit will assist you to meet living expenses and debt repayments.
Income Protection policies will usually pay a benefit up to 75% of your gross income (some policies may pay higher) after a waiting period. Payments continue for a set term or until you return to work, whichever occurs first.
There are two types of income protection contracts – agreed value and indemnity. Agreed policies are no longer open for new business, so all new covers are indemnity. You must also decide on your waiting and benefit periods, both of which can alter the cost of your cover.
An indemnity income protection policy will pay a monthly benefit based on your income at the time of claim. This means your payment may be reduced if your income has dropped since starting the policy. Indemnity cover is often more affordable upfront, but may offer less certainty if your earnings fluctuate or reduce over time.
An agreed value income protection policy is where the monthly benefit is agreed at the time of application and will not reduce even if your income decreases after your policy commenced. This option provides certainty and peace of mind on how much income you will receive. If details of your income are provided at the time of application the benefit can be guaranteed so that no further financial assessment is required at the time of claim. Agreed value contracts are not available to new policy holders from 31 March 2020, however existing policy holders with an agreed value policy will still be able to increase their benefit amount.
You can generally claim a tax deduction for the premiums paid on an income protection policy (other than any portion of the premium attributable to benefits of a capital nature, such as physical injury or critical illness).
An income protection waiting period is the time you must be off work before an income benefit is payable. Waiting periods range from 14 days to two years. Generally, the longer the waiting period, the lower the cost of the income protection insurance.
Starting at the end of the waiting period, the benefit period is the maximum time the benefit is paid. Options range from two years, five years or until a specified age such as age 65. This means that in the event you claim your income protection policy, you will be paid for that period of time at a maximum.
Premiums for all types of personal insurance will vary with age, gender and smoking status. Occupation and medical history may also affect the cost of premiums. This is why it is essential to conduct a pre-assessment upfront to understand what your options are. Insurance premiums can be primarily structured in two ways: ‘variable age stepped’ and ‘level’ premiums.
A ‘level’ insurance premium is where the premium rate is fixed when you start the policy and does not change as you get older except in line with CPI indexation. Level premiums are initially higher than stepped premiums, but will be more stable over time. Having level premiums can help with affordability and reduce the risk that premiums will become unaffordable as you get older.
A variable age stepped premium is an insurance payment option where your premium rate increases each year according to your age. Stepped premiums are initially more affordable than level premiums, but over time may become more expensive. However, this option can provide you with flexibility as your needs change over time.
Life, TPD and income protection policies can be owned personally or through a superannuation fund. Trauma insurance can be owned personally. When held within a superannuation fund, the policy is owned by the trustees of the superannuation fund, for the benefit of the member. When making a choice of how to own the policy you need to consider the advantages and disadvantages of each option.
The advantages of owning your life insurance Australia policy inside your super fund can be:
The disadvantages of owning your life insurance policy inside your super fund can be:
The advantages of owning your insurance policy in your personal name can be:
Disadvantages of insurance policy ownership in personal name:
How insurance premiums and claim proceeds are taxed will depend on the type of insurance policy and beneficiary, but will also depend on whether you choose to hold the policy inside or outside of superannuation. You should seek specialist taxation advice to check the taxation applicable to your circumstances.
Insurance premiums inside your superannuation fund are deductible to the fund. Insurance premiums paid for from your personal cash flow outside of super are not tax deductible except for income protection policies.
When applying for insurance you will need to complete an application form providing both personal and medical information so that the underwriter can assess the application. Some applicants may also need to undergo a medical examination and/or blood tests or a report may be requested from their usual doctor to determine whether to accept or decline the cover. High levels of cover may also require financial underwriting and further justifications for the sum insured.
Insurance loadings are additional premiums applied to your cover to compensate the insurer for the risk taken based on your circumstances. Depending on your health you may be asked to pay an additional premium, known as a loading, if you have an unfavorable medical history or display higher risk factors for developing chronic illness such as being overweight or high blood pressure. Loadings can range from 50% to 150%. It is recommended to seek professional assistance if a loading is offered as there may be alternative providers with more favorable terms.
An exclusion is a term on your policy that excludes a particular condition or activity in the event you claim. For example, a decision may be made to not cover you for high-risk activities and sports or a pre-existing injury/illness. This means that if an event occurs that is excluded, the benefit under the policy will not be paid.
Many policies are guaranteed renewable. This means that as long as you pay the premium you will continue to receive cover regardless of any changes in your circumstances or health.
If you do not pay your premiums, your insurance will lapse. Some life companies may provide a short window of opportunity to pay your overdue premiums to maintain the cover if you have missed the due date. If your policy lapses and your health or circumstances have changed it may impact on your ability to get the same cover at the same premium.
It is important to understand the benefits included in your policy, and optional extras. Benefits included are at no extra cost, however optional extras may increase your premium.
We can help you find the best terms on the market regarding your health and medical history, job occupation and other factors you may not consider. We provide access on our website to a health questionnaire form. Once completed, we contact insurer underwriting on your behalf to determine your initial eligibility and whether any loadings or exclusions can be expected. On average it takes between five and ten minutes to complete the form – use the link below to get started and we will be in touch.
If you are considering life insurance or other insurance cover for you and your loved ones, we can help you. Start by booking a call to discuss your options, or alternatively, request a call back and we will be in touch. We can help you in a range of ways including:
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