How often do we put more care into our tangible assets than ourselves?
It's a quirky question, but one that gets to the heart of our conversation about personal insurance. We often insure our cars and homes, but pause for a moment – aren't you an asset worth protecting too?
In this eye-opening episode, we’re joined by Nareena Aracas, a seasoned financial adviser and co-founder of Guideway Financial Services . As a mother of two and a true fee-for-service professional, Nareena brings her expertise to a topic that's often overlooked but vitally important.
We discuss the essentials of personal insurance, from why it's crucial to safeguard your future, to the nuances of stepped versus level premiums. Nareena also offers insights on when to consider these insurances and where to get them. Furthermore, we dive into the often-confusing differences between getting insurance inside and outside superannuation.
Plus, we include questions from the GRSC community to answer real concerns and curiosities of everyday Aussies. Her insights are a wake-up call to review how we value ourselves in a world where our possessions receive more financial protection than we do.
First off, why should you consider getting insurance?
Let’s start with a question: How often do you think about insurance? For many, it's probably only when facing a crisis or a significant life event. Our anecdotes shifts the perspective from "insurance as a last resort" to "insurance as a strategic protection worth getting".
One unfortunate event could change your life forever
Did you know that one in seven women will be diagnosed with breast cancer before age 75? These startling statistics bring to life the harsh reality of unforeseen medical events.
Nareena recounts the harrowing experience of a friend who was diagnosed with breast cancer at 40. While her health insurance covered treatment, it didn't cover a $25,000 breast reconstruction surgery. Fortunately, her trauma policy covered this cost.
However, not everyone is fortunate enough to enjoy a happy ending. There are also stories of individuals whose lives went upside down overnight because they did not have the critical help from insurances. Tash saw this first-hand during her occupational therapy studies, and realised how life can change in an instant.
Insurance should evolve with you
Ana's perspective as a mother and homeowner brings a relatable angle to the conversation. She discusses how life changes like parenthood and homeownership alter our needs and responsibilities. Nareena agrees, suggesting that key life events like the ones Ana mentioned should trigger a review of current coverage.
Investing in peace of mind
Yes, insurance is an expense. It also doesn't give you the gratification of watching an ETF portfolio grow. However, the true value of insurance is in the peace of mind it can offer. Whatever happens, you can focus on recovery and rehabilitation without the looming stress of financial ruin.
What are the different types of insurance?
Insurance is a bit like a life jacket – you hope you never have to use it, but you're glad it's there when you need it. We explore below the types of insurance you can get, each serving a specific purpose in safeguarding your financial future.
Life Insurance
This one's straightforward. Life insurance provides a lump sum in the event of your death or if you're diagnosed with a terminal illness. This type of insurance ensures those you care about are financially secure in your absence. It's relatively affordable and straightforward – you either need it or you don't.
Total and Permanent Disability (TPD) Insurance
This is where things get a bit complex. TPD insurance kicks in when you're permanently disabled and unable to work. Here, TPD offers a lump sum to replace your income, often surpassing what government support could offer.
But here's the catch: the definition of 'permanent disability' varies with insurers. It’s crucial to understand these details, as they significantly impact your eligibility for a payout.
Income Protection
Think of income protection as a safety net for your pay cheque. It replaces a portion of your income if you're unable to work for a period due to illness or injury. But, the specifics matter – from the waiting period to the percentage of income covered. Understanding these can make a huge difference to your budgeting, especially if it’s 'feast or famine' for you as a freelancer or contractor.
Trauma Insurance
Often overlooked, trauma insurance covers specific illnesses or injuries, like cancer or heart attacks. It provides a lump sum to help with treatment and recovery costs. It's not about long-term income replacement but about immediate financial relief during a critical time.
Review the fine lines of a policy
Each type of insurance we summarise here is a piece of the puzzle in your financial safety net. However, not all policies are created equal. The nuances, like 'own occupation’ vs. ‘any occupation’ in TPD insurance, can determine whether you receive a payout.
Additionally, beware of one-size-fits-all policies, especially those bundled with superannuation. They may not cover your specific needs.
What’s the difference between stepped premiums and level premiums?
When it comes to life insurance, one of the critical decisions is choosing between stepped and level premiums. But what do these terms mean, and how do they impact your financial planning?
What does stepped premiums mean?
Imagine life insurance premiums like a staircase. With stepped premiums, each year is a step that might get a little steeper. Initially, the cost is lower, which might seem manageable in your youthful years. However, as you age, just like climbing stairs, the effort – or in this case, the cost – increases. This can be particularly noticeable as you enter your later years, when, ironically, you might need the coverage most.
Who’s this for?
This option might be for you if premiums might feel like a heavier burden, especially when you’re young and possibly earning less.
What are level premiums?
Imagine paying a flat rate for a service, regardless of your age. This is the essence of level premiums. Initially, you might pay more compared to stepped premiums, but over time, this amount remains constant. Think of it as paying a bit extra today for a more predictable future.
Who’s this for?
If you plan to hold a policy for a significant period, say over 13 years, level premiums could be more cost-effective.
Choosing between the two: The role of inflation, personal circumstances, tax implications
The plot thickens when we talk about tax implications. If your policy is within your superannuation and you're under the preservation age, the payout could be taxed as high as 22%. So, we’d advise you to understand the tax consequences of your insurance choices and plan accordingly.
A hybrid solution: Super-linked policies
For those seeking a middle ground, there's an intriguing option called a super-linked policy. This hybrid model marries the advantages of holding a policy outside of super (like tax benefits and better terms) with the convenience of paying through your super. It's a strategy that requires professional advice but offers flexibility for those grappling with unpredictable cash flow.
When should you start considering these insurances?
You might think insurance is a 'later in life' concern, but what if we told you it's relevant the moment you start earning? Nareena points out that your super fund, which kicks in from your first pay cheque, often includes default insurance coverage.
However, if you’re 21, with no dependents, do you really need a $250,000 death cover? For someone in this situation, it sounds like overkill, right? That's what Tash thought when she encountered this scenario.
So, when should you start considering insurance?
Nareena highlights two pivotal moments: taking on a mortgage and starting a family. These aren't just financial responsibilities. They're promises we make to our loved ones for stability and security. And your insurance needs to reflect these substantial shifts in your priorities.
Where should someone go to get these insurances? Is it worth seeing a financial adviser?
It's easy to feel overwhelmed by the plethora of insurance options. You've got life, health, trauma, and more. What's essential? What's excessive? Where do you even start? Most people juggle these questions, but the answers are not always straightforward.
Seek a financial adviser but keep an eye on the fee structure
To start with, Nareena emphasises the importance of consulting a professional adviser. Why? Getting insurance is all about understanding what you actually need. It's meant to fit your specific circumstances, income, and dependents.
That is the real value of advice, but the way you receive and pay for this professional advice matters.
Online comparisons of insurance products seem convenient, but they often don't tell the whole story. Who's recommending what and why? As it turns out, the adviser's role and fee structure can significantly affect your choices.
Not all advisers do, but some advisers might receive commissions from their recommendations. According to Nareena, some advisers rely on partnerships and receive up to 66% of an insurance premium as a commission, and about 20% annually thereafter. These hidden commissions could sway insurance recommendations and leave the consumer in a blind spot.
However, there's an alternative: flat-fee advice. A flat-fee model strips out commissions, potentially aligning the advice more closely with your interests.
Which one should you choose: fee-only adviser or commission-based adviser?
The insights above lead to an important question: should you opt for advisers who work on a flat fee instead? The answer from Nareena: it's not about avoiding commissions altogether.
For younger clients, a commission model might seem more palatable, as it spreads the cost over time. However, for those eyeing higher-end insurance, a flat fee might be more ethical and transparent, despite the initial sticker shock. As always, consider all the factors, and choose the option which is right for you.
Alternatively, consider a hybrid fee structure for holistic advice
Nareena highlights that many financial advisers – like her and others at Guideway – are licensed to bundle their advice on many things like mortgage broking, superannuation, and insurance. It’s the kind of advice that can help you find insurance that fits perfectly to the nature of your work and other considerations.
In Guideway's case, they adopt a hybrid model to offer a transparent fee structure. They strip out commissions where possible, opting for a fee-for-service approach. Such an approach can be particularly beneficial for high-end insurances, where commissions can be exorbitant.
However, they also recognise the challenges of convincing younger clients to pay upfront advisory fees. So, they also offer a commission-based model as an alternative.
For example, Guideway’s advisers might cover their advisory services through commissions from related services like mortgage broking. Yet, the commission the advisors receive comes from the bank, not out of a client’s pocket.
As we mentioned, Guideway isn't the only advisory to offer this type of fee structure, so shop around before making a decision.
What’s the difference between getting insurance inside and outside superannuation?
When it’s time to choose where to get your insurance – inside or outside of your super – the waters can get a bit murky.
Cashflow advantage of insurance inside super
Why do people choose insurance within their super? One word: cashflow. Imagine insurance premiums being paid without denting your wallet. That's what happens when they're taken from your employer contributions in super. Simply put, this means no direct hit to your wallet.
But there’s a downside: these premiums, while seemingly 'free', chip away at your retirement savings. Basically, your $1,500 yearly premiums, for example, could have benefitted from the compounding effect. Over a 30-year career, that's a significant dent in your retirement nest egg.
However, it's not all gloomy – you could do a bit of salary sacrifice to replace some of that cost on a pre-tax basis. In short, this is a tax effective way of getting insurance without affecting your cashflow.
Comparing the underwriting process
Underwriting, the process to get insured, often feels like a detective story with you as the main suspect. Within super, it's like an express lane at the airport security check – fewer questions and disclosures, faster processing. The process is typically streamlined since we’re talking about group policy, not an individual policy.
Outside super? You’ll need to have detailed health histories and reports on hand.
What’s really surprising and critical is that seeking mental health support before your insurance application could influence your prospects. For example, group policies offered through super offer a base level of coverage, but as soon as you to want to extend it, the questions get deeper. In some cases, they might knock you back on the basis of your medical history.
For those who have specific needs or are stepping late into insurance, exploring insurance outside of super can offer more flexibility. They consider your individual circumstances, like one-off grief counselling or paying a mortgage, without lumping you into a one-size-fits-all category.
Cost vs Coverage
Ten years ago, the cost gap between insurance in super and external policies was vast and deep. Now, it's more like a crack in the sidewalk.
The choice between insurance inside and outside of super often boils down to your personal health history and financial priorities. Younger, healthier individuals might easily breeze through the underwriting process of super fund insurance. On the other hand, those with more complex health backgrounds might benefit from the tailored options available outside super.
Trauma insurance
Here’s something you might not know: you can't have trauma insurance through super. Yes, even we are stumped, especially considering people are most likely to claim it. This gap in coverage means you might need to look for separate trauma insurance outside super for complete protection.
Questions from the GRSC community
In the pulse of this episode, we turn to the GRSC community and respond to the common concerns of many Aussies on their quest for appropriate insurance.
Q: What’s a reasonable price or percentage of income to pay for personal insurance?
First, it’s going to come down to your circumstances and the right level of coverage for that.
Imagine two 28-year-olds, both earning the same salary, but their financial circumstances are worlds apart. One is saving for a home, debt-free, while the other has a mortgage from an inheritance. And you guessed it: their insurance needs are as different as chalk and cheese.
Second, your insurance decisions should balance your need for coverage with practical affordability and long-term financial goals.
Consider a young, ultra-conservative couple, desiring to insure themselves against every possible risk. For this, they pay a hefty $8,000 annually. This meant sacrificing $6,000 that could have been invested each year. What they thought to be a proactive financial planning turns out to be a burden that would delay their retirement plans.
So, what's the starting point for insurance costs?
While there's no magic number, be prepared to spend over $1,000 on personal insurance. However, this figure may vary based on age, occupation, and the type of policy. For instance, insurance through a super fund tailored to your industry might offer more affordable group policies. Nevertheless, it's a small price for peace of mind, especially when you compare it to something like car insurance.
Q: When do you not need life insurance?
Your needs for insurance, like a river, change course over time.
During our younger years, protecting income and ourselves is crucial. Think TPD (Total and Permanent Disability), trauma, and income protection. But as Nareena points out, death cover might not be as critical for the young. If you pass away, the financial obligations you leave behind might be less daunting than you think.
Every few years, just like you'd service your car, it's essential to reassess your insurance. As Nareena points out, this review should ideally happen every three to five years because life doesn’t stand still.
From marriage to parenthood, each milestone could alter your insurance needs. As you accumulate wealth, your need for certain insurances decreases. On top of that, some insurances become more expensive and, perhaps, less necessary as we age. Your trauma needs might remain constant or even increase, but other areas like TPD, life insurance, and income protection will evolve.
And, of course, it's never too late to get insured. Sure, getting insurance when you're young and healthy is like catching the early train – you get a comfortable seat at a lower cost. But that doesn't mean the doors are closed if you’re boarding later in life. It's about finding what works for you at your life stage.
Q: How do you know that the cover offered is actually the right amount of cover for you? What are some of the things you need to consider?
Imagine you're at a pub, discussing life's big decisions over a casual drink. That's the approach Nareena suggests when evaluating insurance coverage. She encourages a "pub test" – if the suggested coverage doesn't make sense over a pint or pinot, it's probably not right for you.
Tash and Nareena discuss how different life stages and financial situations demand different levels of cover. For instance, if you're single with no dependents and a small mortgage, do you really need a sizeable life insurance policy? On the flip side, as your responsibilities and assets grow, your insurance needs evolve as well. The same applies if you’re receiving generational wealth or inheritance.
The message is clear: insurance is not just a policy, it's a backup plan for life's unexpected turns. Not everyone has family as a fallback option, so the point of cancelling insurance comes when you can comfortably support yourself without it. Until then, it serves as a crucial safety net, even if you think you’re not going to need it.
Q: What do you do if you are denied cover? Invest the amount you would spend on premiums elsewhere?
Denial of insurance coverage can stem from various reasons, with something as common as a visit to a psychologist or a minor gardening injury influencing your eligibility. Mental health, in particular, emerges as the most common exclusion.
But shouldn't seeing a psychologist be considered proactive, even preventive? Nareena believes it's a healthy approach, yet insurance policies lag in reflecting this perspective. The industry still grapples with adequately covering mental health issues like postnatal depression, which is especially relevant for women.
But there's hope. If denied, consider looking into super funds with a high level of default cover. These funds often require fewer health checks, offering a lifeline to those struggling to find coverage. While you’re at it, try to find a super fund tailored to your work-related risks, health considerations, and such.
What about investing the money you'd spend on premiums elsewhere? It's an option, but Nareena suggests that it's unlikely you'll generate enough to replace the value of the insurance. The key is to strike a balance – try to secure some level of default cover while being mindful of your investment strategy.
Take action this week
Here’s the takeaway: you are valuable. Securing yourself goes beyond merely protecting assets. It's about acknowledging that you also deserve care and proactively looking after your future. So, as we wrap up, we encourage you to take these action items from our enlightening conversation with Nareena.
- Review your insurance: This week, take a moment to review your insurance. Understand it, question it, and if needed, upgrade it.
- Seek knowledge, but don’t overload yourself: The internet is a sea of information, but diving too deep can be overwhelming. Focus on finding targeted resources that address your specific needs. Websites like Money Smart can provide a good start for simplicity and clarity around insurances.
- Consider expert guidance: Sometimes, a guiding hand can make all the difference. Look into financial coaching or consult with specialists in areas like mortgage broking and insurance. Companies like Guideway provide tailored advice, especially helpful for those in their 20s and 30s.
If you've found value in this episode, we'd love for you to rate us, write a review, or share with a friend. For those new to investing, don't forget to revisit our first 10 episodes for foundational knowledge. And, of course, join us on our Instagram page , Facebook group , or the Pearler Exchange to continue the conversation.
Happy investing!
Tash & Ana
