What would happen if you could not work due to an illness or an accident stopped you from working? Different types of personal risk insurance can ease the financial impact of these types of unexpected events, but which type is best for you and your family?
This article provides an overview of your options and the things to look out for when considering risk insurance.
When you’re fit and healthy, and your employment feels secure, it’s easy to forget how quickly things can change.
“Losing your ability to perform your regular duties due to an injury or illness can put a stop to your regular income,” says Gerrie Vermeulen, a Financial Adviser and Risk Specialist. “Unless you have sufficient passive income to carry on paying your bills, you and your family would be financially vulnerable. That’s where personal risk insurance can help.”
You may already have some form of personal risk insurance without realising it, as it can be included in your super fund. If you do, Gerrie recommends taking a closer look at what it provides.
“The default cover often provides a false sense of security as it can be very limited, and it will also chip away at your retirement funds,” says Gerrie. “A professional financial adviser can help you find more appropriate cover for your specific needs. The default cover is also not necessarily the cheapest when compared to similar options.”
There are three main ways to protect your income.
Total and Permanent Disability (TPD) insurance
TPD provides a lump sum payment if you are totally and permanently disabled. It can be specific to your Own occupation or a cheaper policy which is based on Any occupation.
“You can use this to pay off debts, such as your mortgage, car loan etc,” says Gerrie. “It can also help to cover medical expenses and any costs associated with rehabilitation or modifications to your lifestyle. You can then invest any leftover funds into income-producing assets to provide a regular income.”
Trauma insurance, also known as critical illness cover or recovery insurance, provides a lump sum if you suffer a serious injury or are diagnosed with specified illnesses.
“These are usually illnesses that would have a significant impact on your working life, such as cancer, heart disease or a stroke,” Gerrie says.
The money can be used for:
Income protection insurance
Also known as salary continuance insurance, income protection insurance provides an ongoing income if illness or injury prevents you from working.
“Each income protection policy has its own definition of what constitutes a ‘disability’ and a range of benefits,” says Gerrie. “It’s important to understand exactly what you’re paying for and how relevant the cover is to you.
You could hold a personal risk policy for 30 or 40 years, so it’s important to make sure you’re only paying for the cover you need. Over insurance can be just as expensive as the consequences of being under insured.
“Australian Unity’s Personal Risk Insurance Needs Calculator can give you guidance of how much cover you require based on your age, income, debts and assets,” says Gerrie. “As every situation is different, we recommend getting professional advice to make sure all other relevant factors are taken into account.”
Statistically, people who have been previously diagnosed with certain conditions have a higher chance and need to make a claim for that condition.
“To be fair to customers with a lower risk profile, insurance companies must factor the existing conditions in when they’re calculating the cost of cover for a new person” Gerrie explains. “Each insurance company has a slightly different approach so, if you have special requirements, a professional adviser can help you to find a provider who will best meet your needs.
"Older people are also more likely to make a claim, so generally your premiums will increase and become more expensive as you age.
“You might want to talk to an adviser about an option known as ‘level premiums’,” says Gerrie. “Here, the premiums can be higher in the initial years as they are calculated according to your age when you take out the policy, but it will remain more consistent as you get older which can make it more cost-effective long term and more affordable in the later years when you need it most. This could provide a significant saving over the long term.”
As with any insurance policy, the devil is in the detail of the Product Disclosure Statements (PDS).
“A PDS is your legal contract with the insurance company and you need a really good understanding of what it means,” says Gerrie. “Something as simple as using ‘or’ rather than ‘and’ in the wording could make the difference between a claim being accepted or denied.”
Gerrie points out that, when you invest in personal risk insurance, you’re paying for peace of mind.
“That’s why it’s so important to take care in making your choice and to seek advice from a professional who knows what wording and benefits to look for” he says. “You want to feel confident that, if the worst should ever happen, you and your family will have the financial protection you need. Unfortunately, you don’t have the luxury to change your insurance policy once you are struck down by the illness or injury.”
Risk insurance is a fallback if the unexpected were to happen to your family. That way, despite the hardships, you can be safe in the knowledge that, at least financially, you and your loved ones are being looked after.