Safeguard Your Livelihood

The last two years have clearly shown that you can take nothing for granted.  Good health, a stable income, the ability to travel – either interstate or internationally – is no longer guaranteed.  The sweeping impact that COVID-19 has had on businesses shows their underlying fragility.  What you build over many years can be damaged or destroyed in an instant by one life event.

It is not possible to insure against everything, however where there is scope to largely mitigate risk, surely that is worth at least investigating?

If you haven’t ever spoken to someone about your insurances or it has been a number of years since you’ve reviewed them, then now is a good time to start.  This is especially the case if you are affected in whole or part by the current lockdowns, as many people are using this time to deal with life admin!

It is important to note that the rules regarding income protection insurance (see below) are changing from the start of October to make the policy terms less generous than they currently are.  Which means that there is an added incentive to review your insurance over the next two months!

The whole process can seem a bit overwhelming, so detailed below is some basic information to start you on your journey and to equip you with some questions you can ask your adviser to ensure that you are getting the best insurance to meet your needs.

What are the types of insurances and when would I claim on them?

Type of insurance How does it work? Tax impact
Life Insurance

Life insurance pays out an agreed sum of money when you die.

People generally take out life insurance cover to repay their debts and help towards living costs of their family members if they were to die.

Insurance premiums outside of super are not tax deductible.

Insurance premiums inside of super can be tax deductible.

TPD (Total Permanent Disability)

TPD pays out a lump sum if you become totally and permanently disabled because of illness or injury.

“Own Occupation” TPD allows you to claim if you are no longer able to work in the job you had before your injury.

“Any Occupation” TPD allows you to claim if you can no longer work in a suitable job for someone with your education and training.

Premiums are not tax deductible.  Amounts received on claim are not taxable.

Trauma insurance pays out a lump sum if you suffer a critical illness or serious injury.

Each policy is slightly different, but trauma policies usually cover conditions like cancer, heart conditions, head injury or stroke.

Premiums are not tax deductible.  Amounts received on claim are not taxable.
Income Protection Income protection insurance pays a set proportion of your regular income if you are unable to work due to total or partial disability.

Premiums are tax deductible.

Amounts you receive on claim are included in your taxable income.

How do I take out insurance?

 If you are considering putting insurance in place (or having existing cover reviewed) through an adviser, then you will usually go through the following steps:

  1. Fact Find – The adviser will ask you about your current financial position, the state of your health and any people who are dependent on you. To get the most out of this meeting, make sure you bring along a list of your assets and liabilities, your most recent tax return or tax estimates, details of any existing insurance and statements from your super fund.  It is even better if you can send all documentation to the adviser in advance, so that they have a chance to look through everything before you meet (and compare your current premiums to the market).   The other thing that you will need to tell your adviser up front is whether you have previously had any significant medical conditions, as this may alter the advice they will give you.
  2. Statement of Advice – After you have met with the adviser in the fact find, they will advise you about what they believe are the best insurance policies for you (brand, amounts insured, inside/outside of superannuation). The adviser should step you through all of this to make sure you understand it, and will answer any questions you have.
  3. Underwriting – Once you are comfortable to proceed with the advice, then your adviser will submit an application to the insurer with your health details and the amount of insurance you are applying for. The insurers will assess all of this information and confirm whether they will insure you and, if you have had prior health conditions, whether they will charge you anything additional (loading) for the insurance, or exclude any health conditions.
  4. Implementation – Once you and your adviser have heard back from the insurers, if you are happy to proceed with the terms of the insurance then the adviser will finalise everything with you and put the policy in place.

Whilst there are a few steps involved in the process, a good adviser will make this process as streamlined as possible and set up the policies so that they won’t need to be substantially changed in the short or medium term.

The earlier the better

When you take out insurance on your life, the insurance company looks at your overall “risk” when they are insuring you.  The key factor is your underlying health, which means that the cheapest time to lock in your insurance is when you are young.  Under the current rules, once you have been underwritten for an insurance policy, as long as you keep paying the premiums, the insurance company cannot cancel the policy (even if you have health issues in the future).

It is important to note that the rules are changing in October 2021 and policies taken out after this point won’t have the same generous underwriting terms (especially relevant if you are changing careers or seeing income fluctuations after putting your policy in place).

Insurance within superannuation

It is possible to hold your life insurance and a small amount of income protection insurance within superannuation.  People choose to do this for a range of reasons but the main two are:

  • Affordability – you can draw on your superannuation to assist with the policy payments.
  • Tax deductibility – if you make payments to your superfund to cover these policy payments, the contributions can be tax deductible.

You should always speak with your adviser to determine which of these is the better option for you.  Insurance within superannuation can assist with affordability, however where you hold the insurance may have an impact for you later, such as accessibility of claim amounts and whether there is additional tax payable.  Additionally, if you don’t make additional contributions into superannuation to cover the premium amounts, this strategy will reduce your superannuation balance through your accumulation stage, which may impact you in retirement.

As you can see, I’m a passionate advocate of ensuring that all professionals are properly insured.  You’ve spent great sums of money and time to be qualified in your profession and to build up the wealth in your business.  That investment can be lost in an instant if you are not protected properly.  It is well worth the time and effort to ensure that everything is properly in place.

By Elissa Lippiatt
Chartered Accountant and Director

This article is designed to provide generic information only and should not be viewed as a recommendation to act or financial advice. Individuals should seek advice from a qualified adviser to ensure their actions are commensurate with their financial needs and requirements. Whilst every effort has been undertaken to ensure accuracy of information at the time of publication, the information contained within the article may have changed prior to and subsequent to the article’s publication.

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