Importance of Life Insurance.

During times of economic uncertainty, insurance and in particular, life insurance may be an expense clients feel they cannot afford.
 
Many people may look to cancel insurance or reduce the amount of insurance they have. However, this may be a time when insurance is more crucial and when clients cannot afford to be without insurance. There is a increased need or higher levels of insurance when other assets have dropped in value

When determining the required sum insured amount for life insurance, client’s assets which can be converted to cash (such as super, shares and managed funds) are usually taken into account and reduce the amount of insurance cover required. In an economic downturn the value of these assets are typically reduced and therefore the level of insurance required is higher.
 
In addition, an increased need for insurance is created for those without any existing cover.

Example – this is a guide only.

Samuel and Patricia are married, with two young children. Samuel, aged 45, earns $85,000 per annum and Patricia, aged 40, earns $55,000 per annum. Samuel and Patricia currently both have $200,000 of life and TPD insurance each.

Samuel and Patricia approach their financial planner to assess their life insurance needs in July 2008.

Samuel and Patricia's house was bought for $500,000 in April 2008 with a mortgage of $350,000. They have two cars worth $20,000 each. Car loans and personal loans come to a total of $40,000. Credit card balances amount to $10,000. They also have$10,000 in the bank, $15,000 in a term deposit and $85,000 worth of shares. Samuel and Patricia have $250,000 and $120,000 in superannuation respectively.

Total family living expenses are approximately $3,000 per month.

The calculation for the sum insured is done separately for Samuel and Patricia and for each type of insurance required.
 
The calculations below show the sum insured for Samuel's term life insurance only.
 
Calculation of Samuel's term life insurance could be:

Trauma insurance for cover of a major illness should also be looked at.
 
However, the value of their super and shares have dropped significantly since July 2008 and now their shares are only valued at $50,000 and Samuel's super is only valued at $150,000. Total assets easily convertible to cash if Samuel dies amount to only $225,000 now and therefore required term life insurance increases to $850,000.

Importance of insurance when chances of redundancy are high

Redundancy and disablement can occur at any time and are outside an individual's control. Whilst clients cannot insure against being made redundant, the financial loss from temporary or permanent disablement or critical illness can be insured for by taking out income protection, total and permanent disablemet (TPD) and/or trauma insurance. Redundancies and job losses have increased in the current economic climate, increasing the importance of income protection, TPD and trauma insurance. Not only is there a lack of jobs available, if a replacement job can be found, it may be at a reduced salary.

Redundancy and disablement can occur at any time and are outside an individual's control. Whilst clients cannot insure against being made redundant, the financial loss from temporary or permanent disablement or critical illness can be insured for by taking out income protection, total and permanent disablemet (TPD) and/or trauma insurance. Redundancies and job losses have increased in the current economic climate, increasing the importance of income protection, TPD and trauma insurance. Not only is there a lack of jobs available, if a replacement job can be found, it may be at a reduced salary.

Example

Colin and Sophie, both aged 40, have two children aged 12 and 13. Colin is self-employed as an electrician and Sophie is an accountant. Neither Colin nor Sophie have income protection, TPD or trauma insurance.

Colin and Sophie have a relatively large mortgage and therefore 70% of their income is used to cover the mortgage and pay other bills.

Because of the economic downturn, Sophie's accountancy team has been downsized and Sophie is made redundant. She receives 12 week’s salary as part of her termination payment. Unfortunately Sophie is unable to find work straight away and must also settle for a job that pays 20% less than her previous job. Colin and Sophie's income still covers the mortgage and other bills, however they could not afford for either of them to be out of work for more than eight weeks.

If Colin or Sophie were to become disabled now and unable to work, they would fall behind on their mortgage payments after eight weeks. If this were to continue for an extended period of time, they could lose their house.

If Colin and Sophie were to take out income protection, TPD and/or trauma insurance, they would have the reassurance that if either of them were disabled and unable to work, they would still be able to pay all their bills.
 
Overall you need to review your own insurance needs to make sure that you are adequateley covered.
 

Please contact Incomeprotection.com.au to discuss in more detail your insurance needs.  Freecall 1800 20 20 44

Important note:

The information contained in this publication is of a general nature only. The information has been compiled based on regulatory policy at the time of writing. We recommend that you refer to your professional tax, financial planner or legal adviser prior to implementing any recommendations you may make based on the information contained in this publication.