Insurance, no matter what type, is one of those things that no one likes paying for and often we convince ourselves we don’t need it.

There are some insurances like house & contents, car, travel and health insurance that most people have as it is almost mandatory.  

• If you have a mortgage your lender will want to see your current building insurance policy.
• If you are single and earn over $90k (or a family with income over $180k) and don’t have private health insurance then you will be charged the Medicare levy surcharge
• Travel insurance is not mandatory, but most travel agents would strongly recommend you have it, particularly when travelling overseas
• Car insurance, whilst also not mandatory, is something the majority of people have even if it is just third party.

But as financial advisers we often experience pushback from clients when we start talking about life insurance, particularly when we are talking to people in their 30’s and 40’s.  Our Aussie attitude is ‘it won’t happen to me’ but sadly we have many stories where it does in fact happen to people this age.

Just to clarify that when I say life insurance, I am using that term to cover a whole range of personal risk insurance:

• Life insurance – pays a lump sum to your beneficiaries when you die
• Total & permanent disability (TPD) insurance – pays a lump sum to you when you are deemed to be totally & permanently disabled and will never work again
• Income Protection insurance – pays a monthly benefit to replace your income when you are temporarily disabled and not able to work, or can only work part time
• Trauma insurance – pays a lump sum on diagnosis of a serious, specified, illness

Natalie and Clive first became clients of mine back in 2013. At that stage they were both in their mid 30’s.  They had a primary home with a mortgage and an investment property with a loan and both worked full time.  They have no children. 

Based on their financial situation I recommended they take out Life insurance, TPD insurance and Income Protection insurance.  

The type of insurance that you can obtain through a licensed financial adviser is called retail insurance and it is fully underwritten.  Being underwritten means that the insurance company asks a lot of questions about your health and lifestyle and sometimes needs to do blood tests or get reports from your doctor.  This process can sound very intrusive, but the benefit is that you know that you will be paid a benefit when you need to make a claim (unless of course you have omitted information or lied on the application).  

Natalie and Clive went through this process with the end result being that the insurance company accepted their applications at standard rates.  This means that there were no loadings on the premium and there were no medical conditions excluded.

Over the years the sums insured for the policies increased, as did the premiums, but Clive and Natalie were well aware of this as each year we had a meeting to discuss their financial situation, including their insurances.  We did make some recommendations to reduce their level of cover a few years ago when they came into some money, but the reduction in premium was not significant so they chose to retain the higher sum insured.

Sadly, about 18 months ago Clive was diagnosed with Motor Neurone Disease. 

The first thing we did was organise the claim documents for his Income Protection policy.  His policy had a built-in crisis benefit payment which meant they received 6 months of his income protection benefit without having to serve the waiting period.  Clive and Natalie had to arrange for his Specialist to complete a medical form and provide test and scan results, but we took it from there and liaised with the insurance company on their behalf.  

Should Clive still not be able to work after the initial 6 months, the insurance company would then begin making monthly payments until he either turned 65, returned to work or passed away. 

As Clive’s condition deteriorated we needed to consider if we would claim under the Total & Permanent Disability policy or the Terminal Illness definition of his Life insurance policy.  Both benefits would pay them a lump sum of around $1,100,000 but one would be taxed and one would be tax-free.  

The Terminal Illness definition would get the benefit tax-free so we decided to go down that track.  This involved getting two doctors to confirm that Clive’s Life Expectancy was less than 12 months which was heartbreaking for all involved.

The alternative would have been to make a claim under his Total & Permanent Disability policy and get two doctors to confirm that Clive would never work again.  Because this policy was held in super he would have incurred a tax liability of up to 22% of the benefit amount. 

The terminal illness claim was paid out in full, and they used some of this to pay off their home loan and other debts.  Being debt fee with money in the bank allowed Natalie to remain at home with Clive and not have to worry about going to work to pay the bills.  At bit later on, when Clive needed to use a wheelchair, Natalie had the funds available to purchase a special van that would accommodate Clive’s wheelchair.  Clive also travelled interstate to his home state to spend a couple of months with his family and close friends whilst he was still able to. 

Less than a year after his diagnosis Clive passed away.  Natalie, as his binding death benefit beneficiary, was able to withdraw a lump sum tax-free from his superannuation account to repay the remainder of the investment property debt.  With the balance she was able to start a pension which was tax-effective and would also allow her to access lump sums should she need to do so in the future.

Natalie is slowly rebuilding her life without Clive, but is very grateful that the insurance that we recommended 10 years ago was available during this awful time.  It meant that both Natalie and Clive could focus on what was important without the stress of having to pay a mortgage and bills, and it meant they could afford whatever medical treatment Clive needed to make him more comfortable.

And interestingly Natalie has retained her own insurances even though she is in a good financial position, because as she said ‘you never know what is around the corner’.