Episode Details

Personal insurance is becoming more difficult to obtain and increasingly costly to maintain. This blog outlines the approach we take when formulating how much insurance our clients need and strategies to manage its cost.

What is personal insurance?

This blog refers to personal insurance only. That typically includes up to four products:

§ Income protection insurance – which pays a monthly benefit if you are unable to work due to illness or injury;

§ Life – pays a lump sum benefit if you die;

§ TPD – stands for Total and Permanent Disability which pays a lump sum benefit if you are unable to ever return to work in the future, due to illness or injury; and

§ Trauma – pays a lump sum benefit if you are diagnosed with a ‘specified condition’ which, statistically, includes cancer and cardiovascular events. Even if your ability to be able to work is not impaired, you can still claim a benefit. Benefits are paid according to diagnoses, not symptoms.

Other common insurance products such as health, house and contents and car insurances are defined as ‘general insurance’ products. These are the domain of general insurance brokers, not financial advisors.

What determines how much insurance you need?

In most situations, the two key factors which dictate how much insurance you need are:

1. Financial commitments and obligations including mortgages, living expenses, children’s education, dependents and so on. The higher the levels of commitments, the more insurance cover you need. I view the cost of insurance as a necessary consequence of borrowing money. That is, if you aren’t prepared to obtain insurance to reduce your risk, then perhaps you should reconsider borrowing.

2. Your financial strength or net worth. The stronger your asset base is, the less insurance you need, as you have sufficient financial resources to maintain living expenses and meet goals for the rest of your life in the event you cannot work. Of course, if you do not have sufficient assets, you need some level of insurance cover.

Your requirements often depend on your stage of life

In the below video I walk you through the four common life cycle phases and how they relate to your insurance requirements.

[Embed video https://vimeo.com/615661071]

Whilst young adults typically have very small asset bases, they also tend to have very few (or no) financial commitments or dependants. As such, they tend to need very small levels of insurance cover, or possibly none.

When you buy a home and start a family, your insurance requirements are probably at their lifetime peak. That’s because your financial obligations tend to be most significant (e.g. large mortgage, cost of raising children for the next 18+ years, etc.) at the same time as your asset base being relatively low. It is convenient that insurance is relatively cost-effective in your 30’s, so having an adequate level protection is often affordable.

As your kids get older and your asset base grows, arguably you can begin to reduce your level of cover, particularly as it becomes more costly.

As your children approach financial independence and you have concentrated on repaying your home loan, it may be appropriate to begin reducing your insurance cover, particularly as it becomes a lot more costly in your 50’s.

Income protection becomes less valuable the older you are because it usually only pays a benefit until you are age 65. If you are 30 years of age, you are essentially insuring the next 35 years’ worth of in