Insurance—it’s the thing you hope you’ll never have to use, but will be thankful to have when the situation calls for it. Without it, you could be one accident or illness away from going deep into debt. It’s for this reason that insurance is essential for financial security. The insurance market can be overwhelming with options and complexities, making it intimidating and unfortunately leading many people to swear off it completely – to make sure you have the protection you need when you need it, we’ve narrowed the list down to the four types of insurance you shouldn’t go without.
In this article:
- Life Insurance
- Total and Permanent Disability Insurance
- Trauma Insurance
- Income Protection Insurance
Types of Insurance: 4 Insurance Policies You Should Invest in for Financial Security
1. Life Insurance
Key Benefit: Financial support for your loved ones when you pass away
Ideal For: Primary income earners, Parents
Approximate Cost Per Year: $430–$550 per year (average for a 30-year-old non-smoker with a $500,000 policy)
Life insurance helps secure your family’s financial needs should you die, whether it be by accident, illness, or natural causes. This type of insurance is ideal for when you’re a breadwinner (primary income earner), a parent, or when you have dependents that rely on you.
When you get life insurance, you’ll pay a specific amount—known as a—to the insurance provider on a monthly, quarterly, or yearly basis. In return, the insurance company provides coverage for that specific period. Here’s how:
- You, as the policyholder, pay premiums whenever they’re due and you’re guaranteed coverage for your entire life. This is known as whole life insurance.
- You, as the policyholder, pay premiums to be covered only for a certain period of time known as term insurance. If you die outside of your policy coverage, your beneficiaries won’t receive a death benefit.
It’s uncomfortable to admit, but the benefits of life insurance kick in only after you die. Upon your death, the insurance company turns over a payout, or “death benefit”, to your beneficiaries – the amount depends on the premium you pay. Your family can use this money to:
- Make funeral arrangements
- Complete loan and mortgage payments
- Spend for daily expenses
- Fund the children’s education
- Pay off any outstanding debt
- Maintain a certain living standard
So if life insurance’s benefits only come to light when I die, why get it in the first place?
Life insurance is designed to secure financial peace of mind for your loved ones who depend on you. It relieves the financial burden of your death from your loved ones. Consider it as your final gift to them when you’re gone.
Things to look out for when you’re shopping around for life insurance:
- Policy coverage and exclusions
- Premium amounts and payments
- How to make claims
- How to file claim disputes
TIP: Before getting life insurance from a third-party provider, check whether you already have it through your superannuation.
2. Total and Permanent Disability (TPD) Insurance
Key Benefit: Funds to pay for your medical and rehabilitation expenses
Ideal For: Primary income earners, Parents, Working Australians
Approximate Cost Per Year: $430–$550 per year (average for a 30-year-old non-smoker with a $500,000 policy)
Accidents can happen at any time. In some cases, accidents can result in serious injuries, including disability, making it hard (and sometimes even impossible in extreme cases) for you to go back to work. And if you’re unable to work, it’ll be challenging to earn a living.
Hopefully, you’ll never experience this, but depending on your personal circumstances and potentially your work environment, you may want to consider total and permanent disability (TPD) insurance. TPD insurance financially supports you and your loved ones when an accident disables you from working or limits your ability to earn an income.
As with life insurance, you pay a premium in exchange for an insurance company giving you TPD coverage. When you file a claim, the insurance company hands you a payout you can use to:
- Subsidise your remaining income
- Pay for your medical and rehabilitation treatments
- Provide for your family’s needs while you’re out of work
Most TPD insurance policies cover one or any of these things:
- Accident Cover: You’ll be given a payout when you’re unable to work as a result of an accident.
- Illness Cover: This happens when you get sick and end up having a hard time recovering from your illness and accomplishing your day-to-day work.
- Sports Cover: This is an extension of the accident cover, including any injuries or disabilities sustained from sports-related accidents.
When have an accident, you should notify your insurance provider as soon as possible. Before validating your TPD claim, they’ll likely ask you to provide these details:
- Medical diagnosis from your doctor
- Description of the accident or illness
- Details of your work responsibilities
The more prepared for accidents you are, the less they will impact you and your family’s lives. TPD insurance is a step to ensuring financial security for you and your loved ones should an accident, minor or major, impact your ability to work, earn, and provide.
TIP: Note that insurance providers define the coverage of TPD insurance their own way. Before purchasing a policy, make sure you’re clear on these definitions first.
3. Income Protection Insurance
Key Benefit: Source of income for when you’re unable to work due to an illness
Ideal For: Working Australians
Approximate Cost Per Year: $480–$600 per year (average for a 27-year-old employee who will receive a $3,125 monthly benefit)
Income protection insurance provides you with 75%–85% of your pre-tax income during the times when you’re unable to work due to an illness or disability. This ensures you’re able to stay on top of your bills and provide for your everyday needs even when you’re not earning an income.
You can benefit most from income protection insurance if you are:
- Fully/partially employed or self-employed Australians
- Working and have people depending on your income
Working out how much your income protection insurance should be is as simple as looking at your monthly expenses such as:
- Mortgage or loan payments
- Credit card bills
- Food and utilities
- Tuition fees
- Other expenses
Your total monthly expenses should give you a rough idea of how much your income protection coverage should provide you. Note that insurers have coverage limits and caps on the maximum percentage of your pre-tax income can be insured.
Everyone’s circumstances are different, and different insurance policies are more suitable for some than others. Consult with your financial planner to see if insurance is right for you.
Apart from your expenses, factor these things in when calculating for your income protection premium:
- Superannuation contributions
- Current insurance plans (i.e., TPD, trauma insurance)
- Existing private health insurance
Like most insurance types, income protection helps ensure that you and your loved ones are financially supported when you’re unable to work. It reduces the financial stress to provide for everyone and lets you focus on what’s more important—your recovery.
TIP: The kinds of illness or disabilities covered by this insurance vary from policy to policy, so it’s best to check the fine print before signing up for one.
4. Trauma Insurance
Key Benefits: Financial support to help you get treatment for diagnosed critical illnesses
Ideal For: Employed individuals
Approximate Cost Per Year: $400–$600 per year (average for a 35-year-old non-smoker with a $250,000 policy)
Trauma insurance is designed to cover your immediate medical expenses and financial needs when you’re diagnosed with a critical illness. It’s for this reason that trauma insurance is also called critical illness insurance or recovery insurance.
The illnesses that fall under the “critical illness” category varies from insurer to insurer. Common diseases like cancer, heart attack, and stroke are often included in these plans. Here’s a list of other illnesses that trauma insurance covers:
- Alzheimer’s disease
- Chronic organ failure (kidney, heart, liver, lungs)
- Heart conditions
- Loss of speech or limb
- Independent living
- Major organ transplants
- Parkinson’s disease
- Severe burns
- Severe diabetes
- Terminal illnesses
Being diagnosed with a critical illness can be devastating. But with the right treatment, many diseases can be beaten. With trauma insurance, you can have the financial means to get treated and help pay for:
- Short- and long-term medical expenses
- Therapy and nursing services
- Changes in living conditions
Critical illnesses don’t just take a toll on your physical and mental wellbeing. They also impact your finances. While income protection insurance helps subsidise your lost income, trauma insurance gives you a lump sum that covers your immediate medical expenses. This enables you to focus on your recovery without worrying too much about your future finances.
Should I get insurance or not?
As you can probably guess, there’s no one-size-fits-all answer to this. To help you make a decision, we offer these guiding principles:
- Factor insurance costs against your overall financial plans. If affordable insurance gives you peace of mind about your financial future, you can consider buying it.
- The cost of most insurance premiums go up as you age, so getting insurance at an early age can turn out to be cheaper in the long run – not only this, but the younger you are, the more you stand to lose, since you have many working years left ahead of you – making insurance, technically, a better investment when you are younger.
As essential as these four types of insurance may be, it’s still crucial to consult with a financial advisor or insurance agent before committing to a long-term insurance product. By consulting financial experts, you’ll be able to acquire an insurance policy that best fits your and your loved ones’ needs, as part of a holistic financial plan that won’t adversely impact your budget or standard of living.
As experienced financial advisors, we at Raeburn Advisors can help you identify which insurance type will give you peace of mind while still allowing you to achieve your financial goals. Don’t hesitate to call us for practical, jargon-free advice on the pros and cons of different types of insurance policies, superannuation, retirement planning, paying down debt, or budgeting.
Not convinced? How about a free 60-minute consultation for a detailed look at how you can improve your financial circumstances? Book it here!
This information has been provided as general advice. We have not considered your financial circumstances, needs, or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.