How should I structure my insurances?
January 30, 2019
The types of insurance you require will vary depending on your individual needs, but it is important to also consider how you should best structure them.
There are four main types of personal protection insurance:
- Life insurance
- Total and permanent disability (TPD) insurance
- Trauma cover insurance
- Income protection insurance.
Each has a distinct role to play in providing protection, but what is the best way to structure these important insurances?
There is no one-size-fits-all answer, and each person should consider their individual insurance needs when working out how to best structure them.
However, there are some general rules that can be followed.
This is a lump sum insurance that will pay out upon death of the life insured or on the diagnosis of a terminal illness.
This insurance is often found in superannuation funds because the premium is deductible to the fund but not deductible in an individual’s hands.
As the payment would meet a condition of release from super it then makes sense to hold this insurance via superannuation.
Total and permanent disability (TPD) insurance
Another lump sum benefit, total and permanent disability (TPD) insurance pays out if the insured person is totally and permanently disabled.
The assessment is based on the insured’s ability to return to work and if the cover is for “own” occupation or “any” occupation.
If the insurance is “own” occupation, then the assessment is based upon whether you could return to your usual job.
If it is “any” occupation, then the assessment is based on your ability to return to “any occupation to which you are reasonably suited by qualifications or experience”.
Clearly, the “own occupation” definition provides the most comprehensive cover.
But where is it best to hold this cover?
TPD is also deductible within a super fund but not in your own hands, so it makes sense to hold it within super. However, only “any” occupation cover can be held within super.
“Own” occupation needs to be held externally. This means you have to choose between the best cover and tax efficiency.
Some insurance companies have realised this and now provide “split cover”. This allows for an “own occupation” definition but the premium can be paid two thirds by super (and therefore deductible) and one third outside of super.
Trauma cover insurance
Sometimes referred to as critical illness insurance, trauma is another lump sum cover that pays out on diagnosis of a specified major medical illness or event irrespective of the outcome.
It is designed to provide financial assistance with living and medical costs during the recovery phase.
Trauma cover is not tax deductible and there is no incentive to hold it via super. It should be held personally.
Income protection insurance
Income protection insurance pays an ongoing income stream if you are unable to work due to injury or illness.
You can have coverage of two years, five years or right up to age 65, and the cost depends on your age, occupation, coverage period, waiting period and whether the cover is agreed value or indemnity.
Income protection is usually the most costly insurance as the claim rate is much higher than other insurances. However, the premium is tax deductible in your own name, significantly reducing the after tax cost.
Income protection can also be held inside superannuation as the payment of benefits usually meets a condition of release under the ‘temporary incapacity’ arrangements.
Whether it should be held via super or personally comes down your personal needs, tax position, cashflow and the quality of the cover being obtained.
Insurances aren’t all the same. Many people compare insurances just on the basis of cost, but there is often more to it than that.
Life policies can be directly comparable because the claim is unlikely to be open to dispute. However, TPD, trauma and income protection can have different features and benefits that need to be weighed up when comparing different policies and insurers.
Due to increased claims, some insurance companies have been tightening the claim conditions on their policies.
Therefore, it may be worth paying a little extra in premiums to ensure you have insurance cover that will pay out when you need it.
The value of seeking professional advice
Your LDB financial adviser can not only help you decide on the best personal insurance portfolio for now but can regularly review your cover to ensure you are well protected into the future.
To get your personal insurances sorted, give us a call on (03) 9875 2900 or fill out the form below to arrange a discussion with one of our qualified advisers.