Personal Insurance – it’s more than peace of mind

January 2010
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Mark Staggs, Director & Principal Consultant at Strategic Financial Management Solutions, and Authorised representative of Godfrey Pembroke Limited Australia provides insight on the importance of personal insurance. Personal Insurance – it’s more than peace of mind Mention the word insurance and most people’s eyes start to glaze over. As a financial adviser I regularly see new clients who up until our meeting haven’t really considered the importance of protecting themselves and their families. Sadly insurance is often something that we don’t really think about until it’s too late. Many of us assume that the level of insurance provided through our superannuation will be OK if it is ever called upon – but what happens if it’s not? Wouldn’t you prefer to have the peace of mind that comes from knowing that should the worst happen, you and your family are provided for? This article aims to look at two of the often overlooked - but possibly most important types of insurance cover you should consider adding to your portfolio – never forget that your ability to earn an income is actually one of your greatest assets.

The importance of protecting your income against both long and short-term health problems

For most people their income is the backbone to their current and future prosperity. Let’s face it, it provides for all your current lifestyle needs from food and clothing, to education and mortgage repayments. Indeed the list goes on and on. Importantly though, your income also provides for your future - it prepares you for retirement through contributions to superannuation and of course, if there is any left over it can be used for savings.

The issue then is what would you do if this income suddenly stopped due to a sickness or an injury? Many people have the reassurance of some salary continuance cover within their superannuation account – but what if it was a long term health problem? Is your current level of cover adequate?

For many people, the insurance cover offered through their superannuation plan only provides a benefit for a maximum period of 2 years. The issue then becomes what happens if the sickness or injury lasted longer than 2 years?

My belief is that people should consider adding long term income protection to their existing cover. Products are now available that can provide a monthly benefit that will protect the holder until they reach age of 65. Indeed new policies can even be established that start paying out after the benefit period of the initial policy runs out.

If we used an example of the potential benefit payable for a client aged 30 who earns an income of $100,000 p.a. the maximum benefit payable is 75% or $75,000 and this will be paid on a monthly basis like a salary resulting in $6,250 per month being paid.

A 2 year benefit policy would therefore pay:

$6,250 per month x 12 months x 2 years = $150,000 in total assuming the client was unable to return to work for the entire period.

If a ‘till age 65’ policy was set up to start paying a benefit after the original policy ceases. This would mean that over the period it could pay:

$6,250 per month x 12 months x 33 years = $2,475,000

The total payment being $2,475,000 + $150,000 = $2,622,000

Keep in mind the actual figure paid could be higher if the policy was index-linked to inflation.

The provision of this regular income for a prolonged period, provides not only peace of mind for the client, it also enables them to maintain a comfortable lifestyle and still plan for retirement. I think this is a far better outcome for a client and their family.

The second insurance coverage that should also be considered is trauma insurance.

The importance of Trauma insurance

When I first mention trauma insurance to my clients, many people’s first response is “What on earth is that’?

The simple answer is that trauma insurance provides a lump sum payment if certain health events occur, for example a malignant cancer, major stroke, heart attack, or major organ transplant. In reality trauma insurance covers around 40 different serious health events, and while none of us want to think about it, the chances are high that one of these events could occur to us.

If this did happen to you, what would be the outcome? Generally most people would need financial assistance to help with gaining the best possible medical assistance. You may need access to non Pharmaceutical Benefit Scheme medication which is extremely costly. Perhaps your spouse would need to give up work or take some time out to help with your recovery or if you’re single you might want a lump sum available that covers your lifestyle needs prior to your income protection policy commencing.

Let’s face it being diagnosed with one of these illnesses would be stressful enough for you and your family without also having to worry about your finances. The aim with trauma insurance is to reduce financial stress by making money available to pay for any necessities.

As a financial adviser I know that insurance is often seen as yet another expense but is your financial independence something you really want to gamble with? I advise everyone no matter what their circumstances, to make sure they evaluate their needs on a regular basis and consider what level and types of insurance cover are right for them.

A qualified financial adviser can help – they can work with you to understand your needs and liabilities to ensure that both you and your family are protected in any event.

Mark Staggs is a financial adviser at Godfrey Pembroke and is on the Momentum Financial Adviser Panel.

Note: The views expressed in this article are those of the author and do not necessarily represent the views of and should not be attributed to Plum Financial Services Limited.

Mark Staggs (Director and Principal Consultant), and Strategic Financial Management Solutions Pty. Ltd. are Authorised Representatives of Godfrey Pembroke Limited ABN 23 002 336 254, an Australian Financial Services Licensee, Registered office at 105 –153 Miller St North Sydney NSW 2060 and a member of the National Australia group of companies.
This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.
Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.