Personal insurance explained: life, TPD, trauma and income protection
Personal insurance protects the thing most people forget is their biggest asset: their ability to earn an income. The right cover depends on your debts, your dependants and your stage of life, and it should change as those do. This article is general information; a financial adviser can recommend cover for your situation.
The four main types
Life insurance
Pays a lump sum if you die, or are diagnosed with a terminal illness. It’s designed to pay off debts, cover funeral costs, and replace your income for your family.
Total and permanent disability (TPD)
Pays a lump sum if you’re permanently unable to work because of illness or injury. Policies define this as being unable to work in your own occupation or in any occupation you’re suited to by education, training or experience. Own-occupation cover is broader but more expensive, and can’t be held inside super.
Trauma (critical illness)
Pays a lump sum if you’re diagnosed with a specified serious condition, such as cancer, heart attack or stroke, whether or not you can still work. It helps with medical costs, time off and adjustments at home. Trauma cover can’t be held inside super.
Income protection
Pays a monthly benefit, typically a set percentage of your income, if you can’t work because of illness or injury, after a waiting period (often 30 or 90 days) and for a benefit period (for example two years, five years, or to age 65). For many people, this is the most important cover of all.
How needs change with age
- 20s, single, renting: income protection is usually the priority. Life cover may be minimal if no one depends on you.
- 30s and 40s, mortgage and children: the peak years for cover. Life and TPD to clear the mortgage and support the family, income protection for your earnings, perhaps trauma.
- 50s, debts falling, children leaving: cover can often be reduced, saving premiums.
- Retirement: income protection ends, and life cover needs are often small or met by assets and super.
Review your cover after any major change: a new mortgage, children, a new job, starting a business, or paying off debt.
Self-employed?
If you can’t work, the business may stop too. Income protection for self-employed people is based on your business income, so keeping your tax returns and financials up to date matters if you ever need to claim. Business expenses insurance, which covers fixed business costs while you recover, is worth considering.
Inside or outside super
| Inside super | Outside super | |
|---|---|---|
| Who pays | Your super balance | You |
| Tax on premiums | Not deductible to you | Income protection deductible |
| Cover available | Life, any-occupation TPD, income protection (some limits) | All types, broader definitions |
| Effect on retirement savings | Reduces your balance | None |
Default cover inside super can stop if your account is inactive for 16 months or your balance is low, so check you still have the cover you think you have.
Stepped or level premiums
Stepped premiums are recalculated each year based on your age, so they start cheaper and rise. Level premiums are based on your age when you take out the policy, so they start higher but rise more slowly. Over a long period, level premiums can cost less overall. Both can increase if the insurer reprices its policies.
What affects the cost
Your age, health, smoking status, occupation, the amount of cover, waiting and benefit periods, and policy features. Disclosing your health and lifestyle honestly when you apply is essential; non-disclosure can void a claim.
Get advice
Insurance is complicated, and the cheapest policy is rarely the best. Clarity Wealth’s financial planners can review your existing cover and recommend changes, working alongside your accountant on the tax and on cover held through your super or SMSF.