Last month we looked at the importance of personal insurance and the types of policies to protect against risks to your financial well-being. This month, we outline three important things to think about when choosing personal insurance.
Everyone is different, as is their personal situation, so while there is no one size fits all approach the three steps outlined below will point you in the right direction.
- Quantify the risks you face and what you actually want to insure against. Put simply this means think about what you and / or your family would need in the event you or another family member were to pass away, suffer from serious illness / injury or be permanently disabled and unable to earn an income for a significant period of time. Work out the debts that need to be repaid / serviced, living expenses to be covered to retirement (and beyond) as well as planned or unplanned expenditure e.g. school fees, medical costs. If you are a business owner and have key personnel or a business partner, maybe your business should be thinking of insurance to prevent a major loss or secure an adequate succession plan.
- Structure the policies to best cover the risks by choosing the types that are most relevant such as death cover, income protection, trauma or disability. Look at what policies you currently have and find the optimal way to get what you want i.e. within superannuation, outside of super or a combination – using superannuation is a great way to protect your cashflow and get peace of mind that you have the right cover. Different policies also have ancillary benefits that can partially cover a risk without the need to have another standalone policy. Often it will come down to knowing terms and conditions for when you might need to make a claim, added benefits that are available, minimising the impact on your cash flow and what medical requirements you may need to satisfy. However, don’t just rely on your default cover in superannuation is this is likely to be is inadequate. A good example is income protection with a benefit period of two years, or a disability policy that won’t pay out if you can be retrained to do another job at significantly lower pay – hardly protecting your most important asset (your ability to earn an income)!
- Minimise the cost though options such as choosing level premiums over stepped, which means paying a little more today but locking your premium at current rates so they don’t become prohibitively expensive later on – this can save tens of thousands of dollars over the life of a policy. It is also important to shop around to get value for money, insurers will offer discounts if more than one policy is taken out, some insurers are better for certain occupations or pre-existing medical conditions. Most importantly, DO NOT PAY COMMISSIONS as many advisers or online sites will take 110% of the first year premium and 10% every year after – they will say it’s the insurance company paying, but they forget to mention your premium is higher as a result!
While it is possible to do all this yourself it’s not easy to get a true picture of your options without talking to a specialist. Often I have clients that know what they want and engage us for a specific need such as income protection or a fixed amount of life cover. They do this in the knowledge we will rebate all the commissions and get the best deal out of all the major insurers. However, other clients seek advice to help understand their needs as well as to find that balance between getting enough cover and controlling the cost of premiums and using superannuation. It all comes down to the individual, but taking the time to find out more can get you set for long term, and really save you and your family.
Rob Gilmour is the Managing Principal of Wealth Simplicity. The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.