Money and Life
(Financial Planning Association of Australia)
Does everyone need life insurance? Is the policy you’re paying for through your super fund enough? Deciding what sort of personal insurance is right for you and how much cover you need takes time and asking the right questions about your individual situation. Find out more about what you need to think about to get the right insurance to protect you and your family.
With recent media coverage about insurance sales tactics, many Aussies might be concerned they’re being sold personal insurance policies – life, total and permanent disablement (TPD) and income protection – they don’t really need. The fact that some Australians with multiple super accounts are likely to have duplicate personal insurance policies, is also putting the question of adequate insurance into the spotlight. After all, no-one wants to be paying for something they won’t benefit from.
Are Australians over or underinsured?
By focussing on problems with how insurance is sold or the issue of multiple policies through super, we’re overlooking the possibility that many Australians simply don’t have any one policy that will enable them to meet their financial obligations and maintain their lifestyle if the worst were to happen.
As a nation of people we’ve become more and more indebted in recent years. The latest Australian Bureau of Statistics data shows the average Australian household is servicing a high level of debt, thanks to both personal borrowing and home loans. Average household debt has grown by 79% in real terms from 2003/4 to 2015/16 and this is largely because of borrowing to buy property. However, more households are burdened by credit card debt (55%) than a mortgage (34%).
“With the amount of borrowings people have, together with a lack of savings, most Australians have no wealth cushion to fall back on if an unexpected event reduces their income – either temporarily or permanently,” says Murray Wilkinson CFP®, Director and Lead Adviser for Future Gen Solutions in Queensland. “in many cases, families are no more than 90 days away from financial oblivion if they lose capacity to work – or worse – due to illness or accident. And getting insurance cover so they can keep meeting their financial commitments often ends up in the too hard basket, because we’re inclined to think it won’t happen to us.”
How much cover do I need?
According to a February 2018 report from Rice Warner, 94% of working Australians are likely to have some sort of life insurance policy in place, with an average estimated cover amount of $344,500. So it seems the majority of people will have something to fall back on in the event of their death. The report attributes this high incidence of cover to the introduction of compulsory default life cover by superannuation funds.
But it’s not only premature death that families need to worry about. With 81% holding a TPD policy and only one third of working individuals currently insured for income protection (IP), should people be taking out these policies to make sure they have all bases covered? As the Rice Warner report highlights, insurance needs vary according to how many dependents you have and your age. They provide the following estimate of insurance needs for 30-year old parents with children:
- 8 times family income for life insurance on income replaced basis,
- 4 times family income for TPD insurance, and
- 85% of family income for IP insurance.
While these figures could be appropriate to one family’s situation, they may be way over the top or completely inadequate for another family. “Getting the level of cover right is about calculating what it would take for your family to maintain their current lifestyle and objectives if you lost one income,” says Murray. “That means clearing all debt, including the mortgage. Then you look at putting a price tag on current and future goals for your family, from routine household expenses to regular family holidays, activities and outings and private and higher education costs. Any assets you have need to be taken into account too. So it’s not as simple as taking your income and applying a multiple. It may be an easier, simpler approach but it could leave you paying too much month-to-month for your policies or running the risk of not having enough to meet your family’s future needs when a claim is made.”
Is personal insurance cover in super enough?
Bearing in mind Murray’s recommendation that one size fits rarely delivers the best insurance solution, how likely is it that a default life or TPD policy through super is a good match for your needs? “With debts to repay and so many other household bills to keep up with, it’s often the case that insurance through super is the only way to make it affordable for families today,” says Murray. “By paying for insurance cover from super savings, you’re not taking money out of your household budget. On the other hand, the premiums are a drag on your super balance, and you pay the price by having less money earning compounding returns for your retirement. So you’re not getting something for nothing, it just doesn’t impact your cash flow until much later.”
At the end of the day, it’s really up to you how you budget for insurance cover – as a standalone policy or through your super fund. But what is worth doing is working out how much cover you need, and then comparing this with your current policy – whether it’s standalone or through super. As the Rice Warner report points out, super fund trustees are having to make decisions about default insurance options based on their assumptions about general insurance needs. But those assumptions might not apply to you and your finances. “There’s often rules of thumb applied to insurance, such as keeping your premiums the same and reducing your level of cover over time,” says Murray. “This is based on the assumption that you have fewer debts to repay as you get older so you won’t need as large a pay out. But with the steep rise we’ve seen in property values and mortgage debt in recent years, it’s no longer safe to assume that you’ll be debt free by the time you reach your 50s or even your 60s.”
Steps to get the best value from your insurance
Taking yourself through the process to determine your insurance needs is the first step to getting your personal insurance right, says Murray. While it involves answering a relatively straightforward set of questions about lifestyle and income, in his experience, it can be something people struggle to do objectively and thoroughly. “It can help a lot to have an objective third party sit down with you to facilitate the whole conversation and challenge you on your assumptions about what your lifestyle is actually costing you,” says Murray. “As CERTIFIED FINANCIAL PLANNER® professionals, we’re well placed to do this because our job is all about getting to the bottom of our clients’ unique situation so we can deliver advice that will help them make the right choices for insurance and all the other contributors to their financial wellbeing.”
A CERTIFIED FINANCIAL PLANNER® professional will also have the tools available to help with the next step in the process – finding a competitively priced policy that matches your individual insurance needs. “With our comparison software, finding a number of suitable policies and benchmarking these on price and included benefits is relatively straightforward,” says Murray. “There’s value in seeking product guidance from a planner rather than using online comparison tools because they’ll be more aware of the exact nature of the policy you need, having walked through the first step with you already. In assessing your whole financial position they’re considering your choice of insurance as something that should dovetail with the rest of your personal and financial circumstances.”
Not sure what sort of insurance you might need? Find out about more about different types of personal insurance and discover just how the financial planning process can add value to your lifestyle and finances.