Personal Insurance Advice – A Life Example

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By Nicholas Horstman, Associate Financial Advisor

Personal insurance has evolved over the years to incorporate different types of cover, various options and different ownership structures. For someone who doesn’t work in the industry, it can appear rather unnecessarily complicated. Let me give you an example how we, as advisers, assist clients in the recommendations, ongoing review and claims process.

Meet Peter and Mary, a couple in their early 20’s. Following a referral from a friend, they met with Tim an adviser who worked close to where they lived. After gaining a good understanding of the couple’s current financial circumstances as well as the things that are really important to them, Tim recommended amongst other things the couple apply for retail insurance cover.

Given the young couple’s tight cashflow and goal to save for a deposit for a house, he suggested:

  • Their life insurance (a lump sum benefit should the life insured pass away) as well as total and permanent disability (TPD for short which is generally also a lump sum benefit if the life insured is deemed totally and permanently disabled) be held in a superannuation environment to help ease the burden on their cashflow. This also allows the trustee of their respective super funds to claim a tax deduction for the premium which helps to reduce the cost of cover to them.
  • He suggested holding income protection (a monthly benefit that replaces around 75% of their pre-disability income) in their personal names given the cost of the premium can be claimed as a personal tax deduction and their incomes were expected to increase in the future so the tax benefits would increase as well. He suggested a 30 day waiting period (this means the couple would need to be unable to work due to sickness and or injury for 30 days and continue to be unable to work as a result of these injuries after 30 days to be eligible to claim). Given their young ages, Tim suggested a to age 65 benefit period which would ensure Peter and Mary could continue to receive a benefit when on claim right up to their 65th birthday.
  • He also added a benefit that ensures monthly benefits increase with inflation given their young ages and chance of having a long term claim.
  • Tim also suggested trauma cover which provides a tax free lump sum benefit should a defined medical event take place such as cancer, heart attack or stroke although Tim explained to Peter and Mary that most contracts in Australia cover around 40 different events. Tim wanted to make sure the couple could be able to claim on their policies more than once so added an additional option allowing this without the need to prove your insurability at the time of reinstatement.

The couple agreed and Tim prepared a Statement of Advice (SOA) detailing his formal recommendations which they both proceeded with.

Insurances with a young family

Fast forward a year and Peter and Mary are married and have bought their first home with their first child due in the coming months. Tim at their annual review meeting explains their circumstances have changed and now is a good time to review their levels of insurance cover. He suggests increasing their Life and TPD cover given their mortgage and the need to provide an ongoing income stream should one of them pass away. The couple agreed protecting their soon to be young family was important and they proceeded with the changes which were detailed in an updated SOA document.

Claiming on trauma cover and income protection benefit

About six months later Tim receives a call from Peter explaining he has just (following a routine medical examination for a new employment role) been diagnosed with bowel cancer. It came as a complete shock to Peter as he felt relatively fine leading up to the diagnoses. Peter’s oncologist suggested an aggressive treatment approach as the cancer was at a later stage. Tim explained Peter’s trauma insurance provides a benefit for cancer. Tim spoke with Peter’s oncologist to gain a better understanding of the severity and confirmed the applicable definition with the insurer. Tim explained to Peter that he should make a claim on his trauma cover and his income protection as Peter’s oncologist explained Peter would need to be off work for at least three months’ whilst undergoing treatment and recovering.

The insurer, following receipt of the necessary medical documentation and claim forms which Tim helped Peter compile, paid the trauma claim and commenced an income protection benefit. Tim suggested a portion of the trauma benefits be used to pay for ongoing medical treatment and living expenses with the remaining funds to be held in their offset account to help reduce the cost of interest payments on their mortgage. The couple agreed and Tim prepared a new advice document for the clients in line with these suggestions.

How a trauma policy can help in those times of need

Fast forward five years and Peter (fully recovered from bowel cancer) and Mary now have two children, Sophie and Michael and have moved into a bigger home as their first home (a small 3×1) was no longer big enough for their growing family. Peter explained to Tim in their annual review meeting he was suffering from muscle soreness in his right arm and was not sure of the cause but was undergoing tests and scans to determine this. Tim asked Peter to keep him informed once he had a better understanding of the cause.

About three months later Peter rang Tim as he was just made aware of the diagnoses. Peter had been diagnosed with Parkinson’s disease. The news came as a shock to Tim as Peter was a fit, relatively young man who worked a manual labour role and had showed no signs of any health issues for the last five years following his cancer treatment. Peter was no longer able to work in a manual labour role given the ongoing deteriorating of his health. Tim explained Peter was able to claim again on his trauma cover as they had reinstated his cover following his cancer claim. Peter explained he was going to undergo studies to transition into an office based role whilst his health allowed him to. Tim spoke with the insurer who paid out his trauma policy and agreed to pay half the cost of his studies for retraining and pay a partial ongoing income protection claim as Peter was now working in an office based role but on a much lower income compared to his previous manual labour job.

TPD insurance claim

As the years followed Peter’s health continued to deteriorate to the point he could no longer work in any role. At this stage Tim explained his TPD insurance and that a claim should be submitted. The insurer along with Peter’s medical specialists agreed Peter could no longer work in any role based on his previous training, education or experience and that his health was unfortunately not going to improve. Tim explained to Peter some tax would need to be paid on the insurance benefit as the cover was held inside super however the sum insured had been grossed up to take this into consideration. Tim suggested their mortgage be paid in full using the proceeds and the remaining funds be used for some home renovations given Peter’s worsening mobility and ongoing living costs which was also being supplemented by his ongoing income protection benefits.

The importance of a death benefit nomination

After several years of not being able to work, Peter’s health worsened and he sadly passed away. The remaining level of life cover was paid to Mary as Peter’s superannuation had a death benefit nomination in place instructing the trustee to pay any benefits to his spouse who also receives his benefits tax free as she (being a spouse) is a tax dependent. Tim prepared an updated advice document outlining recommendations for the life insurance proceeds with Mary continuing to be a client for many years.

The above story was fictitious however touches on claims I have personally experienced whilst working as an adviser. It highlights the uncertainty of life and how having sound insurance cover in place can make a world of difference to what is a very challenging time for the life insured and their loved ones.

Blueprint Planning Pty Ltd (ABN 78 097 264 554, trading as Blueprint Wealth is an authorised representative and credit representative of AMP Financial Planning Australian Financial Services Licensee and Australian Credit Licensee.

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.

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