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Is it Worth the Risk?

The Financial Planning Association of Australia (FPA) is at the peak professional body for financial planning in Australia. The board is chaired by Corinna Dieters. She has been involved in the financial services industry since 1989.

Most Australians would never consider purchasing a home without insuring the building and the contents, yet many will take on a mortgage without considering insuring themselves against loss of income due to sickness, injury or death. These events can dramatically impact the ability to repay a loan and threaten the ownership of the property. Despite this being a very real problem the level of personal insurance, also known as life or risk insurance, remains low in Australia and those that do have insurance often do not have sufficient levels of cover.

Research conducted on behalf of the Investments and Financial Services Association (IFSA) shows this is a very real problem particularly among families who have dependant children. In assessing the needs of average full time working couples in their mid thirties with young children, IFSA found that insurance at ten times annual taxable earnings is required to maintain a long term standard of living in the event of death of one parent. For full time workers in their mid forties with older children the required level of insurance is six to nine times annual taxable earnings.

Only 4% of parents with dependant children have the required levels of cover, whilst 60% do not have sufficient cover to look after the family more than one year if they were to die. On this basis 2.47 million Australian families are underinsured by about $1,370 billion in total.

When taking on a debt such as a mortgage, it is important for each of us consider how we will repay the loan if we were no longer able to rely on a regular working income. Whilst there may be sufficient savings to draw upon in the short term, this money may quickly be eroded with medical and ongoing care costs.

There are four types of insurance available - Income Protection, Trauma, Total and Permanent Disability and Term Life (see box for more information). Both Total and Permanent Disability and Term Life are referred to as lump sum insurance due to their pay out structure. Total and Permanent Disability insurance and Income Protection are available through some superannuation funds and are already provided to many Australians, however the level of cover is often insufficient. The IFSA research found that those who are covered through superannuation for Term Life cover usually have less than 20% of the recommended level. However superannuation funds often offer a very good way for people to access lump sum and income protection insurance because fund members are generally automatically accepted the cover. Increasing cover through a fund can be very cost effective.

It is recommended that when considering this type of insurance, given the importance of ensuring that insurance coverage is sufficient for individual circumstances, consultation with a qualified and licensed financial planner should be considered.

The Financial Planning Association has an accreditation process for it's member that stipulates legal requirements and codes of ethics and behaviours.

In considering the issue of insurance it is worthwhile understanding what types of personal insurance are available on the market:

  • Income Protection: provides a payment of up to 75% of insured's income if unable to work due to illness or accident.
  • Trauma, also known as critical illness or crisis insurance: provides financial protection in the event of a major medical trauma such as coma, heart attack, stroke and cancer.
  • Total and Permanent Disability: provides a lump sum payment to the insured if they became disabled to the extent they are unable to return to any form of work.
  • Term Life: provides a lump sum payment on the death of the insured.

This article is reprinted from our quarterly published "Financial Matters" Newsletter, Winter 2006 issue.

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