Collins Financial Group

Imagine owning an asset that is more valuable than your house, car and other possessions put together. Wouldn’t such an asset be worth insuring?

Remember buying your first car or some other object that excited you? The sense of achievement and the pride of owning something of great value is a feeling that few would forget.

Later on you have the thrill of purchasing your first home, which brings with it a great sense of establishing your own future and providing a foundation for life for you and your family.

Taking on the responsibility of owning major assets like these is usually followed by a strong urge to protect their value by insuring against mishaps, such as loss, fire, storm or other calamitous events. Insurance makes emotional sense through the peace of mind it provides and logical sense through the security it may provide to replace or repair the asset if the worst happens.

But what is your greatest asset?

Physical assets, such as cars, homes and other possessions may amount to substantial value measured in tens or hundreds of thousands of dollars.

However, these may not be your greatest assets. Your greatest asset is arguably the thing that underpins all of your other purchases and assets and, indeed, your very lifestyle. Put simply, your capacity to earn an income.

Consider your lifetime earning potential

To illustrate how your income earning capacity may be your greatest asset, let’s project some simple figures.

Imagine a 20 year old earning $30,000 per year. Even if that person never experienced a pay rise for their entire life, they will have earned $1.35 million by the time they retire at 65.

Scale that up to a 30 year old earning $100,000. With no inflation their lifetime earnings amount to $3.5 million by 65.

There’s a lot at risk

If you had any other asset that was valued at those sorts of figures you would probably not hesitate to insure it, due to the sheer scale of the cost to replace it. The fact that income is not a tangible asset like a house or car, however, means that many people fail to consider it as an asset at all and leave it exposed to risks.

Even though it is not a tangible asset, income is subject to a range of risks that could temporarily or permanently stop it from flowing. An accident could leave you off work for weeks or months, or in some extreme cases could leave you incapacitated permanently. An illness could similarly affect you for an extended period. In the very worst scenario, premature death could occur and leave a dependent family totally exposed to having no income at all.

Income replacement protects your future

To protect against the risks of income loss and the impact it would have on loved ones, an effective solution is to insure one’s income and one’s life. Income protection provides a monthly income stream for temporary or permanent income loss due to illness or accident. Life insurance can provide lump sum cover to replace a lifetime of income. TPD cover can also provide lump sum cover in case you become totally and permanently disabled. Finally, trauma cover can give you lump sum cover if certain serious medical events occur.

Your adviser can tailor a personal insurance package to suit your situation and help secure your family’s future against the loss of a significant asset.

Taking out cover can be a difficult and confusing experience given the plethora of products available. Here are some tips on how to avoid common traps and pitfalls.

Whether it’s home, car, health or life insurance, ‘one size doesn’t fit all’. Matching your needs to the right type of cover can be a complex business, so it pays to go in with eyes wide open and seek professional advice.

How do you know how much coverage you need?

Before you begin to compare policy benefits and costs, first make a realistic assessment of how much coverage you need. Underestimating cover is a common mistake that leaves many people in a lot of trouble in the unfortunate event of a claim.

In the case of home insurance, underestimating the right amount of cover to replace your belongings or the building may actually mean that you are unable to claim for the full value of any loss. For example, if your home value is $500,000 and you’re only insured for $250,000 (ie 50% of real value), then your insurer can only pay out a maximum of 50% of the amount you potentially need.

Making a proper assessment is particularly vital when it comes to your personal life and disability insurance, since the amounts of cover required can often be a lot higher than you think and the risks of leaving yourself short can have disastrous consequences on the livelihood and financial security of your family. Some may think that a couple of hundred thousand in life cover sounds like a lot, but if there is a $300,000 mortgage, two kids in school and $3,000 in monthly living expenses involved, then $200,000 could be inadequate if the breadwinner can no longer provide income.

Questions to ask before buying a policy?

Do you really know what you are purchasing when you buy insurance? A few simple questions can be very revealing. You should reconsider buying a policy if the answers to these questions do not satisfy you.

• What are the exact circumstances that will qualify for a claim?
• What events are specifically excluded from making a claim?
• What are the specifics on definitions – for example, on an income protection policy, how is “Total Disability” defined?
• Is renewability guaranteed, or does the insurer have discretion to arbitrarily withdraw cover at any time?
• What additional benefits are available apart from the main benefit? To use the example of income protection again – are there additional benefits paid for rehabilitation expenses, hospitalisation, specific injuries or waiver of premiums during claim?
• Are cover increases offered regularly or are benefits indexed to inflation?

Never shop on price alone

As the list above may suggest, the old adage that ‘you get what you pay for’ is especially true when it comes to insurance. A ‘too good to be true’ price may mean there are limitations and exclusions on cover that may only be discovered when you come to claim. There is a big difference between comparing the cost of a policy and its actual value.

A classic example can be found in the area of income protection where policies often known as “sickness and accident” or “personal accident” may have low premiums, but will have no guarantee of renewability if your health or occupation changes. Beware also of a limitation of perhaps two years on benefit payments and severely restrictive claim definitions.

Professional help removes the worry

When it comes to your personal life and disability insurances, enlisting an adviser to help assess your cover requirements and the relative merits and costs of different policies can be an invaluable advantage. The experience and research capability of a financial adviser can take all the worry out of the process and ensure you achieve the dual goals of maximising quality of cover, while minimising costs.

When it comes to personal insurances and protecting the family unit financially, most of the focus is usually on the value of the breadwinner. A deeper analysis, however, shows that a homemaker’s contribution is sometimes undervalued and consequently left underinsured.

A significant proportion of families still choose to have one partner remain as a full time homemaker. While they may not be generating income, it is important to recognise their value when planning financial security strategies.

Defining the homemaker’s role is the first step

To understand just how valuable a homemaker is in practical, emotional and financial terms, just think of the all the functions that they perform.

Children tend to be a major focus for many homemakers, whether it is driving them to school and other activities, helping with homework, or providing a listening ear and a source of guidance and encouragement.

Beyond the children, the homemaker often fulfils many practical functions in running the home, such as shopping, cleaning, washing, gardening and home maintenance. There is also the need to provide food for the family.

Managing the household budget is also often left to the homemaker and this requires time and attention to ensure bills are paid, banking is done and spending is kept in check.

What if they are not around to do it all?

It is relatively simple to calculate the financial worth of a breadwinner, based on their income earning potential. The impact of a losing homemaker, however, is not quite as easy to quantify in dollars and cents.

The reality is that a homemaker also faces risks of misfortune. Illness may strike at any time, a car accident or fall could cause injury and there is also the possibility of premature death. If such an event occurs then the family could be left with very real and significant challenges in trying to replace what the homemaker was doing.

What would the family do to adjust?

There are different options for how the family can cope with the loss of a homemaker’s contribution. One scenario is for the breadwinner to leave work or work part-time so that they can take on the homemaker’s role. This may be the most desirable option if there are young children involved. Another approach may be to employ hired help, such as a housekeeper.

A combination of both these options may also work, perhaps with the help of family and friends.

Whatever choice is made, it may cost a significant amount of money, either in foregone income or in hiring help, to replace the homemaker.

What can be done?

While homemakers are not eligible to take out income protection, there are other protection options that have the potential to offer substantial financial security.

Trauma insurance can offer a cash lump sum payment that is available on diagnosis of a range of specified major health conditions. Depending on the policy this may include heart attack, stroke and cancer. These funds could be used to allow the breadwinner to reduce working hours, leave work altogether or to pay out debts.

Life insurance may provide lump sum cover in the case of premature death or terminal illness, as defined in the relevant policy and the sum insured can be as much as is needed to give the surviving partner the freedom to make their own choices about how children will be cared for and how the home will be managed.

Total and permanent disability (TPD) insurance can be added to the life cover to provide a similar lump sum of cash in certain specified circumstances if the homemaker suffers an injury or illness that prevents them from ever being able to carry out their role.

If you want to properly quantify and insure the value of the homemaker in your situation, your adviser is ready to help.

Creating an investment portfolio with the potential to build some genuine financial independence can be a stimulating journey, but your personal insurance must be part of your strategy.

The idea of creating financial independence and a comfortable lifestyle through a successful investment portfolio is a compelling one. The missing link in many financial plans, however, is a contingency strategy that will help you protect the lifestyle you have now and the financial freedom you are trying to build for the future. Most importantly, a solid risk strategy is essential for helping to protect the welfare of those closest to you.

The self-completing financial plan

When you start creating a financial plan the fundamental first step is to be clear about your goals. The lifestyle you want to enjoy, the places you want to go and the things you want to own. These goals are what gives your plan direction and motivates you to take the steps to get there.

The fundamental purpose of a risk protection strategy is to make sure that your plan is instantly self-completing if the income that feeds your financial plan is suddenly cut off. In other words, if your ability to fund your investment strategy is taken away by a temporary or permanent illness or injury, then you still have the independent resources to fund your goals using a combination of the right types of personal insurances.

Setting up your risk contingency strategy

In the same way that you set up an investment strategy by defining financial goals and quantifying the money you need to achieve them, your insurance planning also needs to be based goals for the lifestyle you want for you and your family if the worst happens. The home you want to live in, the lifestyle items you want to own, the ongoing income you want to ensure a comfortable life and the experiences you want your family to enjoy.

Once the dollar amounts are identified you can then create an insurance strategy that may include a combination of:

• life cover that will pay a lump sum on premature death or terminal illness
• total and permanent disability cover that will pay a lump sum if an injury or illness permanently prevents you from working again
• trauma insurance that pays a lump sum upon diagnosis of a range of major medical conditions, and
• income protection that pays an ongoing monthly income for short or long term periods of illness or injury.

Integrating into your financial plan

When setting up a financial plan and deciding on what savings allocations you will be making toward your financial growth, for a lot of people it simply makes good sense to have a proportion of that amount diverted toward funding your insurance strategy. The investment and insurance components will go hand in hand to create an integrated plan that helps ensure your goals are achieved.

Your adviser has the skills and research capabilities to assess your insurance needs and recommend the most effective and economical options to put your plan into practice.

Thanks to concerted public campaigns, the awareness of mental health in our society has increased greatly in the last decade or so. This change is also being reflected in the way life insurers are dealing with the assessment of applicants who have a history of mental health issues.

The personal and financial cost of mental illness in our community is staggering, but fortunately it is now receiving the recognition it deserves. The statistics paint a sobering picture:

• on average, 1 in 5 women and 1 in 8 men will experience some level of depression*
• an estimated 45 per cent of people will experience a mental health condition in their lifetime*

Greater awareness and acceptance also means that sufferers are more likely to seek treatment for their condition and the stigma surrounding mental health is gradually dissipating.

Changes in the insurance industry

The positive developments in mental health awareness over the last decade or so have also extended to the way mental illness is treated in the life insurance industry. In days gone by, anyone disclosing a mental health condition on their personal statement was given a wide berth by insurers. The difficulties in assessing and quantifying the risks meant that insurers generally opted to play it safe and decline cover.

These days, there is a much more open attitude toward mental illness and insurers are seeking to underwrite mental illness in the same way as they would for other health conditions. Rather than taking a blanket approach of declining cover based on a history of mental health issues, there is a willingness to treat each case on its merits and insurers are now far more likely to offer cover at standard rates.

Balancing responsibilities

Insurers have a responsibility to both their policyholders and shareholders to ensure that they are careful in what risks they take on. This is essential for the viability of their business. Having said that, it is equally important that they honour the Disability Discrimination Act, which compels them to assess risk without prejudice. This means that if they do decline to take on risk it must be justified by a reasonable and relevant assessment of all information and based on statistical and actuarial data.

Insurers will, therefore, take several factors into consideration, including the seriousness of a person’s mental health condition, its impact on their lifestyle, the success of any treatment, management strategies and any ongoing symptoms. The terms offered by different insurers may still vary depending on each company’s premium rates, product features and underwriting philosophy, but acceptance at standard rates is now quite common. If standard rates cannot be offered, then cover may still be available with increased premiums or with certain medical conditions excluded from cover.

Full disclosure helps ensures reliable cover

The law requires an applicant to disclose all the information that may affect their application for life insurance. It is essential that this is done to avoid issues down the track with claims. If the applicant has complied with full disclosure and the insurer decides to accept the application, the insurer is then bound to honour the insurance regardless of any change in health that may subsequently occur.

Growing mental health awareness

The change in attitude within the insurance industry is one part of the continuing effort to give mental health the attention that it deserves. Thanks to the advocacy of organisations such as Beyond Blue and Mental Health Australia, attitudes and perceptions on mental health are changing for the better. Mental Health Week, which runs from 8th to 15th October this year, also plays a major role in raising the profile of mental health, promoting awareness and equipping people with helpful assistance. For more information visit the National Mental Health Commission.

* Australian Bureau of Statistics. (2008). National Survey of Mental Health and Wellbeing: Summary of Results, 2007.