Ingredients Of A Good Financial Plan Part 7 – Insurance: The Defensive Strategy
MBA, BSc, DipFP
Financial Planner / Managing Partner
Ingredients Of A Good Financial Plan – Insurance
Insurance is the one key defensive strategy which is vital to protecting that ground you have gained. You may not think you need insurance, but if you have an income, a debt or a dependent, you do.
If putting a financial plan together was a game of football, many of the tactics we use could be termed ‘offensive’. By which I mean they are aimed at gaining ground, to extend the football analogy.
Why Do I Need Insurance?
Insurance sometimes comes in for some pretty bad press. Many people see it as a waste of time and money, especially if they have no dependents. But nothing could be further from the truth. Insurance provides you with some truly worthwhile benefits, not just a lump sum when you die.
Your ability to earn income is what supports your lifestyle and allows you to meet your obligations. Think about how you would survive and meet those obligations if you unexpectedly had no income.
Even worse, if you were also now faced with additional expenses like medical and rehabilitation costs.
Whether you are unable to work for a short time, a long time, or you require long-term care, the right combination of insurances will ensure you have sufficient funds to see you through and protect your financial plan.
Types Of Insurance
There are a number of different insurance options, suited to different needs. The ins and outs of each are pretty complicated, but in simplistic terms, the types of policies you might consider would include:
Life Insurance – provides you with a lump sum upon your death.[i] Life insurance is useful for protecting encumbered assets like a mortgaged home, providing funds for your funeral and for your family after your death.
Income Protection – provides you with an income stream should you be unable to work for a period of time, allowing you to continue to meet your living expenses. Premiums are tax deductible.[ii]
TPD (Total and Permanent Disability) – provides you with a lump sum, usually paid into your superannuation account, should you be unable to work again. You can opt for ‘any’ or ‘own’ occupation with this insurance.[iii]
Trauma – provides you with a lump sum should you suffer a critical illness such as Cancer, Heart Attack or Stroke to save you from the financial consequences of these life-changing illnesses and help you focus on recovery and rehabilitation.
Insurance Within Superannuation
Most Superannuation policies come with some level of Life, Income or TPD built in, although you can opt out of coverage if you choose.
The benefit of having Insurance within your super is that you are generally not required to have a physical, and since it is part of your super there is no additional paperwork. It is also often pretty cost-effective cover.
There are two main drawbacks. Firstly, the insurance component diverts money from your superannuation balance, reducing your retirement benefit and secondly, the type and level of cover may not be sufficient for your needs. However, some providers will allow you to increase your level of cover.
Whether it is best for you to keep the insurance cover within your superannuation, or opt out and take out other policies, depends on your
How Much Is Enough?
The things you need to think about when you are determining how much insurance is enough include:
- Your current lifestyle costs
- Your level of personal debt, including mortgages, loans and credit cards
- Potential future expenses – like the education of your children
- Any other financial obligations you may have in the future – like caring for elderly parents, or a special needs child or partner
Insurance & The Business Owner
Owning your own business brings with it a whole new set of challenges in relation to insurance. There are a two key insurances you should consider:
Key Person Insurance – protects the business and other partners in the event you are not able to work.
Business Expense Insurance – is generally an add-on to Income Protection for the self-employed.
What Else Do I Need to Know?
All insurance policies have different inclusions and exclusions. Make sure the policy you choose provides the right options and benefits for your particular needs. It might seem tedious, but reading the fine print could be the difference between receiving the payout you are expecting or nothing at all.
Once you have the right policies in place, remember that it should not be a set-and-forget. Review your policies at least every couple of years, or when your financial or personal circumstances change. Taking on a new mortgage, having a baby or starting your own business will all change the type and level of cover you need.
As with anything related to your financial plan, getting expert advice is important in order to make sure you have not just the right type of insurance, but the right amount of cover to protect you, your family and your financial plan.
At Manly Financial Services we have been helping ensure our clients have the right insurance to provide protection for themselves, their families and their financial plans for over 10 years. If you think it’s time you discussed insurance, or you would like to check that your existing insurance meets your needs, give us a call on (02) 9976 3388, or click below and we will be in touch shortly.
[i] Within the policy period
[ii] You can elect the waiting period and payment periods
[iii] Any Occupation means if you are unable to work in any occupation you are reasonably qualified for, own occupation means if you are unable to work in the specific occupation for which you are trained