Insurance, it sounds a bit wrong. Doesn't it. Maybe it is from our collective experience of life insurance salesmen, to the intangible nature of it. I don't know why we have that reaction to the term, but from this day forth I am going to use a new term for it, protection. As I mentioned in my last blog, I believe in the need for people to seriously consider their protection, but I don't want to discuss that. I want to answer one of the question I do get asked often, do I need protection?
If you search do I need insurance (there is that word again) invariably you will get back to web pages written by others that will state categorically that yes, you do need insurance. But is that right? Well, not really. In a lot of cases it is, but for some it is not. So how about I show you how I personally determine what protection I need and give you a brief rundown of the tools we use.
I always start with two questions, because ultimately protection is only about two things (sorry but we will discuss cover for business owners separately).
- If you weren't here i.e. you are dead, yep I said it. DEAD. If that was you, can your partner, kids, dogs and so on, continue to live a life that you would expect them to live?
- If you could not work, whether that is for 6 months or 5 years, can you continue to live the lifestyle you would like to live?
Did you answer no to one of the questions? If you did the chances are you will need some form of protection. So then what? I know I need something but how do we work out what we need?
Let's start with the basics. If you said no to no. 1, what would you need to do to ensure that your partner, for example, could continue to live a certain lifestyle? Would you need to pay off the mortgage? Would they need some more income to support the school fees, money for holidays, money to pay the bills? Once you assign a dollar figure to these things, you need to determine how long you need to fund them for. So for school fees, how many years are left of school? If your partner could not work because there are young children, how long until they could work and would it provide enough income? Can your partner earn enough to continue to allow the kids to do all the things they wish to do, such as dance classes, or footy? If not, how much extra would you like to see them receive to enable them to do all this?
You then need to think about no. 2 in much the same way. If I couldn't work again, how much income could I survive on? Would I need to pay off any debts? Do we really want the kids to go to that private school? If so how much is that? What about medical costs?
Once you have an idea of what you want to cover, we begin to think about the tools. What will help you fund these things? Broadly speaking there are 4 main types of insurance that help you to achieve different parts of the protection puzzle.
Moneysmart (www.moneysmart.gov.au/insurance/life-insurance), which is an Australian Government website defines the four main types of insurance as:
- Life cover - also known as 'term life insurance' or 'death cover', pays a set amount of money when you die. The money will go to the people you nominate as beneficiaries on your policy.
- Total and permanent disability (TPD) cover - pays a lump sum to assist with rehabilitation and living costs if you are totally and permanently disabled. TPD is often bundled with life cover.
- Trauma cover - provides cover if you are diagnosed with a specified illness or injury. These policies include the major illnesses or injuries that will make a significant impact on your life, such as cancer or a stroke. It is sometimes called 'critical illness cover' or 'recovery insurance'.
- Income protection - replaces the income lost through your inability to work due to injury or sickness.
So, Life insurance helps provide an answer to No. 1. If you were no longer here it will pay out a lump sum to a person that you define (the rules are a little different inside superannuation so please check these first). These funds allow that person to do the things they need to do to continue living life, whether it be paying out their mortgage, paying for the kids to go to football or paying the day to day expenses of life.
The rest are here to help you when you either can't work, or are diagnosed with a serious illness such as cancer. They fit together, so that if you are off work for a short period, say 6 months, your income will continue in part. If you were never able to work again, if for example you became a paraplegic, the TPD and Trauma payments would assist in paying off the mortgage and medical expenses for example. What they do, is allow you to focus on getting better and not on the money. And after all, isn't that what we all want?
So, there you have it. A crash course in how I work with clients to work out what level of cover they need, and how I personally assess cover. Once we have worked out what needs to happen, I can go to work putting together the puzzle to ensure it all happens, and is the most appropriate cover for you.
Have you thought about getting protection but thought it is too daunting? Why not let me make it easy for you. Book a meeting here: www.calendly.com/robert-watson