Key points
There are four common personal insurances, but some add a fifth.
- Life insurance
- Total and permanent disability (TPD) insurance
- Critical illness insurance
- Income protection insurance
- Business expense insurance
Coverage varies between insurers, so seek professional advice when comparing the fine print.
Susan’s Story
Two years ago, Susan was sailing along with life. She was running her investment property as an Airbnb. Along with managing another small business, she was also working a part-time job. Her yearly income was averaging $70,000. Then over six months, her energy and health began to wain without explanation. Ignoring symptoms, Susan battled on until one day she couldn’t.
Diagnosed with a debilitating autoimmune disease, Susan had no choice but to sell her investment property and small business. Then after using all her sick days and annual leave, her part-time position became redundant. So over a space of five months, her income slid from $70,000 per annum to zero.
Fortunately, Susan had cash in the bank, along with income protection and total permanent disability insurance. Her only regret was that she didn’t have business expense insurance. With that, she may not have had to sell the investment property she was running as an Airbnb or eat into her savings.
“There were times when reviewing my premiums I questioned whether I needed so much personal insurance cover. Thankfully, I kept all my policies,” says Susan. “While my income protection only paid 55 per cent of my pre-illness income, it was enough to get by until until my TPD payment came through two years later.”
As Susan’s experience shows, healthy people get sick, have accidents or die. With personal insurance cover, Susan could:
- Make mortgage payments
- Continue making car repayments
- Cover personal debts and expenses
- Take care of bills while focusing on getting better
With her TPD payout, Susan had the financial space to reinvent her life to accommodate living with her permanent illness.
Types of personal insurance
Luckily there is a range of personal insurance products available to protect you and your family against the financial impact of unforeseen health events like Susan. The four common personal insurances covering injury, illness or death include:
- Life insurance
This cover gives those your care about most financial security in the event of your death. If you die, your policy pays a lump sum benefit to your family. (Always seek professional advice when choosing to take life insurance inside or outside of superannuation.)
- Total and permanent disability (TPD) insurance
TPD cover provides you with a lump sum if you are injured or fall ill and are permanently unable to work, like Susan. But TPD policies vary markedly from one insurer to another. For example, one insurer may cover you for disablement that prevents you from working in your current job. Whereas, another insurer may stipulate cover only if you’re unable to work in any job. (Seek professional advice when choosing between TPD insurers.)
- Critical illness insurance
Critical illness or trauma insurance provides you with a lump sum if you suffer a severe injury or illness such as cancer, heart attack, coronary bypass surgery, stroke and other diseases as defined by your particular policy. Unlike life insurance, which only pays out on your death, critical illness fills the gap if an illness or injury that lasts for years.
- Income protection (ICP) insurance
This cover replaces a portion of your income in the event you are temporarily or permanently unable to work due to illness or injury. The maximum percentage of salary that insurers will cover depends on your policy, but the maximum is 75 per cent. So keep that in mind. Plus deciding the length of benefit period is important too. Payment periods available are one year, two years or up to age 65. The length of the benefit period affects your premiums.
If you run a business, as Susan did, consider adding business expense insurance to your cover. Business expense insurance can take care of 100 per cent of your eligible business overheads—for example, rent, insurance, non-income producing wages staff, lease costs and more.
COVID-19 highlights the importance of insurance
While an autoimmune disease put Susan’s health to the challenge, what about the risks COVID-19 presents? Can you afford not to insure your life and income?
Worker’s compensation will cover me, right?
There is an incorrect assumption that worker’s compensation will cover you if you catch COVID-19. Workers compensation only covers employees injured at work or who become sick directly from their employment. So unless you’re a health worker exposed to COVID-19 in the line of duty, worker’s compensation won’t cover you.
Similarly, if you contract coronavirus at a supermarket, for example, or have an accident on the way to or from work, workers compensation does not cover you.
What type of insurance covers me for COVID-19?
For the most part, life insurance policies don’t have a pandemic exclusion and will still payout for COVID-19 claims.
What type of insurance does not cover me for COVID-19?
Total permanent disability cover. While there aren’t any exclusions for COVID-19 in most TPD insurance policies, you still need to meet the medical criteria for a total permanent disability claim.
So unless COVID-19 leaves you totally and permanently disabled and unlikely to work again in any job relating to your training, education and experience, you won’t be able to claim.
Critical illness insurance. Trauma insurance covers you for a lump sum payment if you become critically ill or injured and need extensive medical care for your recovery. However, you’re only covered if diagnosed with an illness or injury listed in your policy.
While COVID-19 may not be a defined sickness under a trauma policy, serious cases of coronavirus may be defined under other specified illnesses like intensive care, needing continuous ventilation for a certain number of days. So check the fine print of your critical illness policy.
How to sort through the fine print of personal insurance
Sorting through and comparing the fine print of competing personal insurance policies can be overwhelming. To gain clarity and peace of mind for the unexpected moments in life, talk to us at Carbon Wealth. Our financial planners can help you determine the right level of personal insurance for your circumstances.
