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The Four Main Types of Insurance.

  • Willard Lloyd
  • November 20, 2019
Reading Time: 6 minutes

All of these four insurances can be called “life insurance” as they are all insuring your life.

  • Death cover
  • Total & Permanent Disability (TPD) Cover
  • Trauma or Critical Illness cover
  • Income Protection (or salary continuance)

Death cover

What triggers a payout: Your death or generally upon 2 doctors stating you have less than 18 months to live (on all retail policies, check your group and direct policies).

How is it paid: A lump sum.

How can I pay for it: Your bank account or from your super fund.

When do I need it: If you have financial dependents and debt that needs to be cleared for them.

Is it tax-deductible: Yes, if paid from a super fund, it’s deductible to the super fund. You could then salary sacrifice pre-tax to your fund, therefore, making the cover tax-deductible. Death proceeds in Australia are generally not taxable, so you do not need to increase your death cover amount to cater for this.


TPD cover

What triggers a payout: You being totally and permanently disabled due to accident or injury and after three months being deemed by a medical professional that you’re able to work* ever again. This does include mental health, not just an image of someone lying in a bed unable to walk ever again.

How is it paid: A lump sum.

How can I pay for it: Your bank account or from your super fund.

When do I need it: If you do not have enough money saved to pay off your mortgage, buy a home and to fund your retirement (basically most people need this if you’re 21 or 51!).

Is it tax-deductible: Yes, if paid from a super fund, it’s deductible to the super fund. You could then salary sacrifice pre-tax to your fund, therefore, making the cover tax-deductible. The payment made from super would be taxed, so you really do need financial advice to work out if you need to up the cover to pay any tax.

*In super, your TPD definition will be “any occupation”. This means that if you can work in “any occupation” that you’re reasonable trained for or suited to.  You can have a linked amount of TPD cover which is held outside of super that is “own occupation”. This is a stronger definition, so if you can’t work in your “own occupation” ever again, you would be eligible to claim. They’re not going to make an accountant or engineer go to work in a grocery store if they had an “own occupation” definition. Statistically, most “own occupation” claims would have been paid on the “any occupation” definition but you get one shot at this – so get advice!


Trauma cover or Critical Illness

What triggers a payout: 95% of all claims are paid upon diagnosis of a heart attack, cancer or stroke – across all ages. There are generally over 40 critical illnesses covered on a good retail policy. I.e. major burns, coma, loss of limbs, intensive care/life support etc (if you were in a car accident for example).

How is it paid: A lump sum.

How can I pay for it: Your bank account – this can’t be funded by your super account.

When do I need it: If you wish to have a buffer in place for medical expenses or some extended leave from work for you or your spouse if you were diagnosed with a life-threatening illness.

Is it tax-deductible: No. However, claim payments are tax-free.


Income Protection

What triggers a payout: If you’ve been off work due to an accident or illness during the set waiting period. Generally, it’s a 30-day waiting period. 90 days if you have your full emergency fund in place, to cover the loss of income over the first three months. You are not paid during the waiting period.

How is it paid: Via monthly instalments in arrears. You can insure 75% of your pre-tax income including superannuation. It would be paid for as long as the benefit period is (i.e. age 65 or 70) or until you return to work. Whatever comes first. You can also receive a TPD or Trauma lump sum and still receive your income benefit.

How can I pay for it: Your bank account or your super with a small portion paid via your personal bank account.

When do I need it: If you have an income that you rely on (aka… everyone, unless you have enough wealth to fund your life and you’re only working for the social benefit!).

Is it tax-deductible: Yes! However, your monthly income instalments are taxed as income.



How much cover do you need?

Death cover: I would think enough to pay off the family home or buy a home if your family is renting and then possibly 10 years’ worth of income for your spouse and family.

TPD cover: Enough to pay for a home to live in and medical expenses (say, $100k) and then possibly an amount to fund your retirement living expenses. You would also have Income Insurance, so if you couldn’t work ever again, you would have a home paid for and then your income until age 65 or 70.

Trauma cover: My rule of thumb is $100k for medical expenses and if you earn over $100k, do a year’s worth of gross income, too. This is just to manage the cost of the premium for those earning under $100k. I would always recommend at least $100k of Trauma cover

Income Protection: 75% of gross income and super (total employment package). Always do at least age 65 benefit period and only do a 90-day waiting period if you have a fully-funded emergency fund, to cover the first three months or if you have a crazy amount of sick leave or long service leave that you may wish to take on the risk. The longer the waiting period, the lower the cost.

Most people reading this should seek a 30-day waiting period. An adviser could get creative if you have a high-risk occupation and need to pay more – she or he may split the benefit up and put half on 30 and a half on 90. Get advice!


Premium types

Stepped premium – each year the premium steps up and increases as you get older. So, it’s cheap when you take the policy out but will get more expensive over time.

Level premium – the premium is based on your age at application and does not increase year-on-year because of your age.


Commonly asked questions

Am I covered if I lose my job?

With income protection insurance, you’re only covered for accident or illness. Generally speaking, you would only insure yourself for things you can’t control. If you lost your job, you would be able to get some part-time temporary work if it was a dire situation. You should also have an emergency fund of 3 months of cash, if possible.


I’m young & single, I have no kids and no debt. Do I even need insurance?

Yes. If you are working for an income, it means you need money to live. If this is the case you need to protect this. If you think you do not need to protect your biggest asset, which is your income – why would you bother insuring your car? It does not work nearly as much!


What is the absolute priority in order, if money is tight?

If you have kids or a family:

Death Cover, Income Protection, TPD, Trauma.

If you’re single:

Income protection, TPD then Trauma (however, most TPD policies should be linked to death, so you’d get it anyway).

I would still get all four covers while you’re young. The reason is, cover is locked in while you’re healthy and at a young age. If your health changes in the future, you may not be able to get insurance at a good rate.


What if I can’t medically get insured with a good retail policy?

You would keep any cover in place that may be a default option in your super. You can then see an adviser who may have access to accident only income insurance or death cover for you.


If my spouse does not work outside of the home, do we need insurance for them?

Yes! If your spouse was to die, become disabled or suffer a traumatic illness, you need to ensure that all debt can be cleared and an amount to possibly provide for a nanny/housekeeper for death/TPD. For trauma insurance, you would want at least $100k for medical expenses for your non-working spouse and possibly some income replacement should the main income earner need to take time off work.


Can kids be insured?

Yes, generally speaking, any child in good health and over 2 years old can get a child cover policy. This is like a trauma policy but for kids. The maximum you can insure your children for is $200,000. The insured amount would be for medical expenses or to enable the parents to take leave from work should a traumatic illness occur on the life of the child.



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