Failing to protect your household?

Are you so busy establishing your career and your home that you’ve failed to protect your household by not having enough insurance?

Many households believe they’ve got enough if their insurance in super will cover their home loan – but forget that if they’ve got dependent children they will need a lump sum to generate income to support the family and replace the income lost through the death or permanent disablement of a breadwinner.

For older couples it’s worth reviewing your insurance needs as you and your children get older. You’ll have had time to pay off the mortgage and probably don’t need the same level of cover you had when starting the policy.

Take doctors Andrew and Toni* – between them they earn almost $500,000 a year and owe $900,000 on their home loan. Kept busy with three young children, they’d given little thought to what would happen to their family if one of them died or was unable to continue working.

“Between them they had about $650,000 in default [life] cover through super,” says broker Kris Mason of MBS Insurance. Not enough to cover the mortgage, let alone a lump sum to provide income for their family if something happened.

“They wanted to be able to send all three kids to private schools [for high school], which would involve about $100,000 a year. And they wanted similar income to their current levels – Andrew earns just under $400,000 and Toni about $100,000 for three days’ work.”

Life cover of $3.5 million was set up for Andrew – enough to pay off the home loan and leave $2.5 million to provide income for the family of about $125,000 a year. Income protection was also organised, to give him $20,000 a month (about 75 per cent of his income) as well as trauma cover of $200,000 (to top up the income protection plus cover other incidentals such as home alterations).

The income protection would be paid out 90 days after he became unable to work after illness or injury, because the family could survive three months without income (and the premium was about 30 per cent cheaper than the more common 30-day wait). If needed, this would be paid to him until he turned 65. The trauma cover, says Mr Mason, would be paid out as a tax-free lump sum on diagnosis of certain medical conditions or illnesses (cancers, heart attack, stroke etc) – and could pay for extra home help or more time off work.

For Toni, life cover of $1 million was organised, plus income protection based on $100,000 a year and trauma insurance of $150,000.

All up, the family’s insurance bill is $7000 a year – not a huge hit at 1.4 per cent of their annual pre-tax income. For households earning less, big annual premiums can be more of a worry.

An option in some cases is comparing policies on websites like www.canstar.com.au and then buying direct from an insurer. But as Canstar points out, with the level of disputes going through the ombudsman over whether a claim was payable – indicating some confusion over what policies actually offer – getting professional advice may avert this.

If you would like professional advice to protect your household you can make initial contact with us by phoning Michael on (02) 9299 7044 or visiting our Where do I start page.

* Not their real names, based on an article in the The Australian Financial Review 25 June 2014, with thanks.

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