Risk management and in particular personal insurances are a vital ingredient of any comprehensive financial plan.
Just as you insure your house, car and other property against loss, so too you should ensure that you hold suitable personal insurances that may include life and income protection insurances.
Risk management and personal insurance must be considered as an integral part of the financial planning process. Just as you insure your house, car and other property against loss, you should also ensure that you hold suitable personal life insurance against illness or death.
Have you thought about how your family or your partner would cope financially if you died or were not able to work? Personal insurance can help to prevent your dependents from being financially disadvantaged if you die, suffer a medical crisis or are disabled.
Most people purchase house, car, and health insurance without much thought, but are either underinsured or uninsured for events such as death, trauma or disablement. You and your ability to earn income is probably your most valuable asset.
Determining the level of insurance
Sometimes, the hardest part of organising personal life insurance is working out how much you should be insured for.
When determining how much you should be insured for take into consideration goals such as:
- Providing a lump sum to repay your debts and decrease financial pressure on you and/or your family so your assets can be retained
- Providing an income stream to either fully replace your salary or to cover any ongoing expenses
- Covering expenses that may arise, such as medical expenses, time off work whilst recovering, paying for care, funeral expenses or home modifications.
Even if you are not currently earning an income, you should still consider covering yourself for any expenses which could arise if you die, become disabled or suffer a serious illness.
Lynette is a stay at home mother caring for her three children. Her oldest child is at school and the other two attend pre-school two days a week. Lynette’s husband, Jim works full-time.
If Lynette passed away or became disabled the family would not lose any income, but Jim expects that he would continue to work and the family may incur additional expenses
If Lynette is disabled, they may need help to care for her and assist in caring for the children. If she was to pass away, Jim may wish to hire a nanny or other help to care for the children and the home.
Lynette and Jim decide to take out term life and TPD insurance policies on Lynette’s life. The insurance will pay a lump sum to either Lynette or Jim (if Lynette dies) which could be used to cover these expenses.
As part of the underwriting process, Lynette may have to justify the selected insurance cover to ensure that the amount is reasonable given her personal situation and is not just opportunistic.
Calculating the amount
You might wish to calculate how much insurance to have using one of two options: expenses method or replacement method.
Under the expenses method you can try to estimate what expenses need to be covered (over a determined timeframe) and apply for insurance equal to this total amount. Under the replacement method you might take out cover to replace your annual income multiplied by the number of years of your remaining working life. Or you might look at a combination of the two options.
Whichever method you use, you should consider how you will meet the following expenses:
- School fees and education costs for children
- The impact of inflation on expenses
- Providing an income for each dependent child for a number of years
- Repayment of debts, and
- The costs that would be incurred if you died, became disabled or suffered a serious illness.
It is too easy to miss important considerations and apply for inadequate levels of cover. Advice is important.
Your financial planner can assist you to determine which types of personal life insurance are appropriate, how much cover you need and which life insurance companies provide the best products for you. Take action today.
As already stated, he sad fact is most Australians are underinsure or not insured at all. We can assist you to determine which insurance is appropriate for you and the level of cover you need.
Speak to our Certified Financial Planner – Frank Santagada CFP® Dip FP AFB C.Dec
Contact us on 07 4775 5199