When I was pregnant with my second child I suffered such bad morning sickness that I was unable to work. With a business to run and a two year old at home this could have been disastrous; the bills don’t stop coming in just because you’re not working. Fortunately, I had taken out income protection insurance some years prior – in fact, it was well before I’d become a financial adviser myself.
A letter and medical report from my obstetrician was all I needed to be paid straight away and for the remainder of my pregnancy. I can’t tell you how much weight lifted from my shoulders that day and it made me realise how difficult it must be for people when life doesn’t go as expected and they find themselves unable to work – for whatever reason.
Like me, a growing number of Australian women are choosing to run their own businesses to better manage their work-life balance and economic wellbeing. Just over a third of Australia’s business operators are women (34 per cent) – and two thirds of these women are likely to be sole operators.
However just because you’re working for yourself and not being paid a weekly or fortnightly salary by an employer, doesn’t mean you shouldn’t worry about protecting you and your income. In fact it could be more important for you than ever before. After all, could you afford to meet all your financial commitments – the home mortgage, car loan, household bills, groceries, school fees, tennis or ballet lessons for the kids, the list goes on – if you were unable to work and generate an income for weeks or months?
What personal insurance should I consider?
Whether you’re a business owner or not, the key personal insurances to consider are not just income protection insurance, but also life insurance; total and permanent disability Insurance (TPD); and trauma cover. You may not need all of these, but most people need some of them.
How much do I actually need?
As a financial adviser I spend time working out the answer to this question for clients. Personal insurance is not like car insurance or home and contents insurance. It is not the kind of insurance to quickly arrange over the phone or online. Working out your personal insurance requires consideration of your individual circumstances, needs goals and objectives – so it’s really best done with professional financial advice.
In my experience women often underestimate the value they bring to the running of the house – even if they’re also working full-time themselves. Work out the cost of having someone clean the house every week and someone to cook meals, look after the children, assist with homework and organising social activities – and the sum isn’t usually small.
Should my insurance be held inside my superannuation?
Only three insurances can be held within super: life, TPD and income protection. Holding insurance within super can be tax-effective as premiums are usually paid using pre-taxed dollars – which also reduces the burden on your personal cash flow – but there are also other considerations. Cover provided through super can be more limited than a policy held outside super, payments on claims can take longer, there can be restrictions on who can be nominated as a beneficiary, and potentially tax payable on certain claims.
Let’s take a look at each type of personal insurance and what’s good to know:
Life insurance
If you hold this cover inside your super fund, by signing a valid and binding nomination, life insurance benefits can be paid directly to your nominated beneficiaries in the event of your death. What this means is that the money won’t form part of your estate, which could result in delayed payment to your loved ones if the estate is contested.
However, payments following death can only be paid to superannuation dependants. Also lump sum death benefits from insurance held within super should be tax-free when paid to dependants – although if left to certain non-dependant beneficiaries, such as adult children, tax may be payable at up to 32 per cent.
If you have insurance outside of super there are generally no restrictions on who can be a beneficiary unless your insurer specifies otherwise. And, death benefit claims where the cover is held outside of your super are usually received tax-free. However, premiums will be payable from after-tax income increasing the overall cost of the cover.
It’s also worth knowing that it’s not only when you die that your death benefit is payable – if you’re diagnosed with a terminal illness an advancement of up to 100 per cent of the death benefit is usually payable.
Total and Permanent Disablement (TPD) insurance
Depending on your circumstances, you may pay tax on disability claim payments when insurance is held through super. But tax concessions generally apply if the person is unable to ever again be gainfully employed.
The trustee of the superannuation fund can only pay a TPD benefit in accordance with the trust deed and superannuation law, meaning you will need to meet a condition of release to access any claims payable to you.
Income protection
This type of cover usually provides for 75 per cent of your income when illness or injury temporarily prevents you from working and earning an income. Whilst insurance held inside super is not a burden on your personal cash flow, premiums deducted from your superannuation account may impact your overall retirement savings over time – and the same applies to all other insurances you hold within super.
Trauma
Trauma insurance can only be held outside of superannuation. Trauma cover provides you with a lump sum payment to help give you immediate financial support if you’re diagnosed with a medical condition, serious injury or undergo a medical procedure as specified in your policy. This can include cancer, a heart attack or stroke, just to name a few.
Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.