As we discussed last month, RI Advice have partnered with the EAN with the aim of making sure all EAN members can make informed decisions about their money. This partnership is all about you and we hope you will make use of the resources we have made available for you.

Our dedicated website, just for EAN members, www.youradvicepartners.com.au is now available for you to visit. There is loads of good information about personal finance and is specifically designed for women.

The website also has a special offer to all EAN members. We have an online financial health check tool that is available ABSOLUTELY FREE to EAN members. The “Wealth Report” is an easy and fun way to get a snapshot of your financial position.

We have assembled a team of financial advice professionals from all around the country who can help you if you have any questions about your money, budgeting, super, life insurance, Wills and Estate Planning. Please feel free to give us a call on 1300 380 880, our national dedicated phone line for EAN members.

This month, I wanted to give you a brief introduction to and discuss a couple of truths I have learned over the years about life insurance. Some of this the general public are highly unlikely to appreciate. (Not a very sexy subject I know, but personal risk protection can be the only thing standing between you and financial ruin just when you or a family member suffers a medical crisis and money is the last thing on your mind).

Firstly, a bit of background:

Types of Cover
There are 4 basic types of “life” cover- Life, Total and Permanent Disablement (TPD), Income Protection (IP) and Trauma (sometimes called critical illness). Many people will have some life and TPD cover in their super, some may even have IP. Trauma is not available in super.

A more detailed explanation of each type of cover can be found on our website in the Knowledge Centre in the insurance section.

Premium Types
Most life insurance is sold on a stepped premium basis. This means that each year, as you get older, and your risk of some sort of medical crisis increases, the cost of cover also increases. Often, by the time you get to your 50’s, the cost escalates dramatically, and your policy will be unaffordable just when you need it most. Almost all super funds will offer only stepped policy terms.

The alternative is a level premium. In this case, the annual cost is fixed when you buy the policy. Whilst it is not guaranteed that level premiums will stay the same forever (some insurers have recently made increases to the cost of some level premiums), the cost of your cover remains the same regardless of your age.

In the early years, this type of policy is more expensive, but over time becomes better and better value. After about 6-7 years it becomes cheaper than a stepped policy and, after that, a very valuable asset indeed. If held from age 30 until retirement, a level policy may end up costing a fraction of what a similar stepped policy would have cost. (Of course, how much can be saved depends upon individual circumstances.)

Level premium policies are usually purchased as stand-alone offerings from good quality insurers.

Now for a few of my insights:

When Should I get Insurance?
One thing is clear about life insurance is that it gets more and more expensive as you get older. With stepped premiums going up each year, it is tempting to run the gauntlet and try to get away without cover for just one more year… or for that matter, cancel your policy as you near retirement.

Conventional wisdom is that you need insurance when you have debt and dependants, but with people holding off getting married, having a family and waiting longer before diving into the property market these days, waiting that long might be a big mistake.

Older clients invariably have longer medical histories. Knee and back problems will invariably attract the interest of the underwriters, as will any history of mental illness. The older the client, the more chance something in their past will cause an exclusion or a loading on a new policy. Some will not be able to even get insurance if their medial background precludes them from cover. Getting in before your body starts to break down can save you a lot of money. (I wish I knew then, what I do know now…)

The advice I give to my clients is, basically speaking, that the younger you get cover, the cheaper and easier it will be for you. This might mean buying insurance notionally even before you  actually need some of the cover. Buying insurance at age 30 is just about the sweet point. (Those in their 20’s are expected to do silly thing to themselves.) But buying at 35 is better than at 40, and 40 is better than at 45 or age 50. Even if you are in your 50’s and you want to protect what you’ve built, the best time to buy is now.

So, saving my two most important points for those who have reached this far…

• The cheapest way to buy the best cover is to buy level premium policy at age 30 (or as early as you can after that) and hold it until retirement at say age 65.

• The most expensive way is to do the same and buy a stepped premium. Co-incidentally, this is exactly the way super funds set up default insurance cover for members… food for thought?

What if I want to reduce or cancel my Insurance?
You should review your insurance needs whenever there is a significant change in your circumstances (like buying a home) or at the very least every few years, if not annually. Not always will you need to increase your cover. Sometimes, you may not need all the cover you have in place.

As you progress through life, you might reduce or pay off your mortgage, the kids might have left home or maybe you’ve been saving and your net worth has become quite a tidy sum. In these cases, you may be able to reduce or cancel your life and TPD cover. If you have trauma, depending upon how much cover and what it was designed to protect you against, you may be able to reduce that as well. My general theory though, is that for as long as you still “need” to work, you “need” income protection.

For many, the increasing cost of stepped premiums will also be a strong catalyst for considering a reduction in cover. It is important though, to fully understand what cover you can afford to be without, so, if you are not sure, please give us a call and discuss it with a professional before you make any decisions.

As advisers, we have all seen the positive outcomes for clients going through a medical crisis who are properly insured, just as we have seen the devastation when a family is hit with both a medical and a financial crisis simultaneously.

There is loads more information on our website and we would be really happy if you wanted to give us a call on 1300 380 880 to chat about your own situation.

RI Advice Group Pty Limited
ABN 23 001 774 125, AFSL 238429.

The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should seek personal advice from a qualified financial adviser. The information is current at time of writing but is subject to change.