Protect the income ‘engine room’
Glenn aims to build assets to fund future income needs for when he enters his retirement years. His plan includes taking on debt against the investments being made. His ability to generate income from employment will ultimately determine the success of the investment strategy. As the income “engine room” he understands the consequences for his investment strategy and lifestyle if he could not work, temporarily or permanently. Because he is single, life cover does not hold the same priority as disability protection.
For income protection
In addition to being insured for the monthly benefit amount, there are a few additional product features that Glenn should consider:
Monthly benefit indexation – policy benefit amount increases each year with CPI.
Claim indexation – while on claim, monthly benefit being paid increases each year by CPI.
Agreed contract – locks in insured benefit amount at application stage (even if income reduces later on).
Specific illness or injury benefit – pays a benefit, for example, if diagnosed with a medical condition such as cancer or heart attack, even if not disabled and working still. Helps with unexpected medical expenses.
Lump sum benefit – allows the insured to commute future claim benefit into tax-free lump sum. Useful if the insured prefers to take a lump sum to retire debt, for example on an asset that could provide a long-term income.
Total and permanent disability
At a minimum, Glenn needs to ensure he is insured for a lump sum benefit to repay all his debt. There are at least six variations of lump sum disability cover. Glenn should consider “own occupation” as it is the most qualitative definition with greatest probability of a benefit payment in the event of a claim. The premiums are not tax deductible, with the proceeds tax free in the event of a claim.
Why not use his super fund’s products?
The income protection product under super does not provide the same qualitative definitions as a personally held policy, would not accommodate any future changes Glenn might make to his work arrangements, and he could find himself underinsured or, even worse, uninsured. Furthermore, there is no capability to include the agreed benefit, specific illness or injury benefit, lump sum benefits or monthly benefit indexation, all of which are important for consideration.
The TPD lump sum definition of “unlikely to return to work” is too risky to rely on if totally disabled and expecting a claim to be paid.
No control over trustee’s decision to change disability definitions in the future.
No opportunity to continue the cover if leaving Hostplus as cover is embedded.
When seeking advice, Glenn should not focus solely on price or tax deductibility but give greater weighting to how policies would perform in the event of a claim.
Roy has 35 years’ experience assisting people with their insurance needs and is a director of Fairbridge Financial Services, which specialises in insurance and corporate superannuation. ROY AGRANAT