Understanding insurance types

The different types of insurance choices include life insurance, critical illness insurance, TPD insurance and income protection.

Life Insurance

Life Insurance pays a lump sum on the death of the life insured.

Many people choose to structure their insurance through superannuation. This means that the trustee of the fund becomes the policy owner and the life insured becomes a member of the fund.

When benefits are paid, they will be received by the trustee who will then distribute them in accordance with the governing rules of the superannuation fund and superannuation law. This method of attaining life cover has tax advantages.

Critical Illness

Also known as trauma or crisis, critical illness pays a lump sum if the life insured suffers a specified medical condition such as Cancer, Heart attack, Stroke and many other medical conditions. The lump sum benefit is free of tax.

Essentially, being diagnosed with a serious illness such as cancer means incurring lots of expenses and the critical illness cover will assist with debt, cover the cost of lifestyle changes and also medical expenses. The two most common cancers are prostate cancer and breast cancer, however, in recent years, there has been a large increase of survival rates.

TPD (Total and Permanent Disability)

To be considered totally and permanently disabled, generally means that the life insured is unlikely to ever be able to return to work. The TPD cover is designed to provide long term financial support if the life insured is unable to return to work because of illness or injury.

There are two TPD definitions to select from

Own Occupation –the life insured’s disability will be assessed against their ability to perform the exact occupation they are working in
Any Occupation-the life insured’s disability will be assessed against their ability to perform any occupation that they‘re reasonably suitable for
E.g. If a surgeon injured his hand and was unable to operate again under an own occupation definition he is likely to receive a total disability benefit as he cannot perform the main aspects of his job. However, if he had an Any Occupation definition he could still work as a lecturer or General Practitioner

Income Protection

Income protection is designed to replace 75% of a life insured’s monthly income if they are unable to work because of illness or injury. The money received is treated like salary and is taxable, however, there is tax relief on the premiums paid.

This is an overview of the 4 main types of insurance in Australia but an in depth look at their suitability to a particular individuals needs is necessary.

A person might require one of the above or all 4, as they each cater for a specific need. The insurance to opt for is identified once a Fact Find and Needs Analysis is completed.

Martin Morris, February 2014

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