Common Insurance Traps You Should Avoid
When we put too much effort into securing our financial situation there is a chance that we will slip up because not everyone is a financial expert. You can certainly arrange for insurance cover to protect you and your family in the event of your death, a medical condition or a temporary loss of work but at what cost? Unfortunately there are a number of huge deterrents when it comes to the matter of risk insurance, one of the biggest being that policies are overly complicated, plus few people want to be reminded of their mortality.
Read the Fine print
There is always the risk that even if we take out some type of risk insurance like income protection insurance, that we haven’t really done enough research to make sure that its adequate for us. That means reading the fine print! Yes it certainly is tedious and rather boring but it is very important before you sign up for something like insurance. For instance, there are many people who purchased permanent disability insurance over the phone along with income protection only to later find out after paying their premiums for decades that the policy would only provide them with $10,000 for a month if they didn’t have work. The reason: insurers want proof or evidence of income that goes back several years.
There isn’t enough cover
You shouldn’t misapprehend the main role of insurance, it’s not out there to make you a millionaire. Income insurance is only there to help you maintain your status quo and with very little disruption. So, probably one of the questions you should be asking is if you have enough cover, sufficient enough to last your family until the kids grow up and to pay off all family debt. It is fairly typical to provide around $50,000 a year to a partner who is not working for the next decade. So, you need to think about what type of life cover you’ll need based on the estimation above. In most causes it’s going to be around a million dollars.
Paying the premium from your retirement fund
There are a number of benefits when it comes to holding insurance within the super. The biggest of these benefits is that it is tax effective. The trustee of your super fund can easily claim a deduction on all the premiums. Another advantage is that larger funds will often qualify for a group discount for the members. Also, superannuation schemes will offer a number of group plans that are automatically underwritten so there is no need for a health check.
The thing that matters is how you are going to pay for it. If the premiums are deducted from your contributions especially if the minimum is 9% going in, the chances are that you’re undermining a good retirement. Here is an example: a 35 year old man who is an office worker and a non-smoker earns around $80,000 annually and plans to retire when he is 65. He is aiming for a $1 million of TPD and life cover, then he also wants income protection with a value of $4000 every month with a minimum 60 day wait period. This will easily cost around $1800 each year. By the time he is 65 he will just have $210,603 in his fund. Compare that to if he were to cover the premiums with salary sacrificing he will end up with $281,462 which is obviously a big difference.
Buying the wrong type of income protection
If you have an annual income of $100,000 and you want salary protection in the event that you’re unable to work. Then you’re eligible for IP which will pay you 75% of your regular salary. However, it can be tricky because under the contract you may agree upon you have to provide all the supporting financial data which supports a $75,000 annual income. So, it will not matter what salary you will be getting when you file a claim the cover will be sent at that rate. Now compare that to an “indemnity contract” that will provide you with around 75% of what your average earnings were at the time you file a claim. So, you’ll have to provide information on exactly what you are earning at that point.
The crucial point here is to be able to understand the difference between both types of contracts. So, if you have an indemnity contract but are earning less, then you will not get the face value of the IP policy, so it’s a waste of money.