What is the point of personal insurance? Put simply, it can help to smooth out some of the unexpected turbulence that life sometimes encounters, just as motor vehicle insurance can help take the financial shock out of events that can occur on the road.
If you have a financial plan, whether it's a short or long term one, then your financial journey along life's road is already mapped out. Serious threats still exist though, particularly in the form of death, illness or injury.
Helping to guard against such threats are three main types of personal insurance – life insurance, total and permanent disability and income protection.
Life Insurance: Putting aside the obvious emotional consequences for your family, if you died tomorrow then who would be affected financially, and how? Could the mortgage be paid? How might future school fees be financed? What would happen to the lifestyle of those closest to you?
In the event of the death (and sometimes the diagnosis of a terminal illness) of the insured, a life insurance policy pays a lump sum. This money can be used to pay debts, pay funeral costs, cover living expenses for family.
Total & Permanent Disability (TPD): An injury or illness that results in your being permanently disabled is also very likely to damage your income earning capabilities. But debts and medical bills must still be paid and the future financial health of your loved ones must be managed.
TPD pays a lump sum if you are 'totally and permanently disabled' and unable to work. Various TPD products carry differing definitions of 'totally and permanently disabled', so ensure this is clarified by your financial planner.
As with life insurance, the TPD payout amount is agreed before the policy is put in place, to ensure it will do the job of helping to pay medical bills and protect your loved ones financially.
Income Protection: If illness or injury leaves you unable to work for a short or long period, the result on current finances and future plans can be serious. An income protection policy can be put in place to help soften the blow, usually offering up to 75% of your current income to be paid to you in place of your regular income.
The replacement income is usually paid monthly, taking away some of the typical financial stresses during recovery and helping to protect future financial plans.
Income protection policies can be highly personalised, including lower premiums for longer waiting periods (replacement income does not kick in until six weeks after disablement, for instance), longer or shorter benefit periods, and either a pre-agreed payout value or a value that is assessed at the time of the illness/injury. Premiums for income protection may also be tax deductible.
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DISCLAIMER:- This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 16 February 2015. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.