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Insurance – the nitty gritty.

Insurance basics

Following on from last weeks post Insurance – do you need it?  this article will list the various types of personal insurance available and give a brief outline of their workings. Insurance is a very complicated subject so therefore in this post I will be giving you the basics of insurance coverage but further investigation and the services of either a qualified insurance broker or financial planner will help with the calculations. Alternatively, I’ll try to give you links to sites where you can make some initial calculations. Many insurance companies have calculators for various types of insurance on their websites, so I’ll include those as we go or at the end of the post.

Types of insurance

The most important insurance you can have to protect your family can cover sickness, injury, total disablement , or death. When a policy provides money as a benefit the amount can be paid as either a Lump Sum (one off payment) or a series of payments over a defined term (as in the case of Income Protection policy).

All these insurances need you to complete a budget (much like a household budget) except that it must include enough capital to cover the future income for any family members left behind if the insured person should be permanently incapacitated or die.

The main types of insurances are –

Income Protection

Income protection is designed to cover loss of wages (up to 75%). This insurance is well worth it especially if the family has only one wage earner. It ensures that in extreme cases where the insured is unable to work again the wages (up to 75%) are paid including  indexation for inflation for the persons working life. If the insured still had 30 years of working life this could be a substantial amount of money (many hundreds of thousands if not millions of dollars).

Premium payments for Income Protection can vary depending on cover taken. You can vary the wait period for this insurance much like you can for the excess on your car insurance. Usually the longer the wait period the lower the premium, therefore 30,60 or 90 day periods before the payments commence, are available.

Total & Permanent Disability Insurance can usually be purchased with a Term Life Policy and it provides a cash lump sum if the insured becomes totally and permanently disabled.

As well as paying for debts, children’s education, funeral expenses, generate ongoing income as for life insurance below but it also includes –

1.Medical expenses cover including expenses related to changes to physical circumstances. These can sometimes be substantial for a permanent disability.

2.Provide income to pay for carers for remaining family members or perhaps even for the insured person.

There is usually a waiting period for this insurance where a person must be unable to work for a period of 3 to 6 months. This will vary depending on the policy type purchased.

Term Life Insurance

– person is insured for a specified amount. This covers in circumstances where they die or are diagnosed with a terminal illness. As you can imagine the death of the main breadwinner in the family could create major financial disruption and heartache to remaining members of the family.

Term Life insurance is designed to –

1.Pay off all debts.

2.Provide ongoing income for dependants lifestyle

3.Pay for children’s education expenses

4.Pay surviving spouse or family if deceased owned a business or was a partner in a business.

5.Provide funds for funeral and other related expenses.

Many insurances are expensive, especially Income Protection insurance, but it is very important you consider your financial position before making rash decisions about whether to insure or not. People who are carrying multiple negatively geared investment properties should definitely consider Income Protection to cover any shortfalls in income if the sole wage earner of the family suddenly lost their job.

I will include here an insurance calculator from AMP insurance. This is in no way an endorsement for AMP I just noticed that their calculator was a brilliant one for the job of calculating a persons insurance needs.

If you have any questions by all means send me a comment.

 

See related posts below

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