Personal risk insurance is an important way of assisting you and your dependants to be financially supported in the event of serious illness, disability or death. If your ability to earn an income is affected, a personal risk insurance policy may enable you to maintain your current lifestyle and continue supporting those who depend on you.

Why do I need it?

While we recognise the emotional impact of events such as serious illness or death, the financial consequences can be equally devastating. If the unexpected did occur, having personal risk insurance can go a long way to helping you and your family meet your basic living expenses such as your mortgage, groceries, petrol or school fees. Depending on the event, you may also need to cover significant medical expenses, rehabilitation, modifications to your home or services to help maintain your lifestyle.

Types of personal risk insurance

Life insurance can help provide financial assistance for a family if they lose the homemaker or breadwinner.

In a business situation, life insurance can help protect against the loss of a key employee or business partner.

TPD is designed to help meet one-off and ongoing living expenses, as well as cover special expenses such as medical and rehabilitation costs. To receive a TPD insurance benefit, you must satisfy specific criteria to establish the genuine nature and extent of the disability (this can vary between insurers). These criteria usually include a range of permanently disabling conditions specified in the policy, such as paraplegia, as well as more general criteria relating to your total and permanent inability to work.

Income protection insurance, also known as salary continuance insurance, pays a monthly benefit of up to 75% of your pre-tax salary if you are disabled due to an illness or injury for longer than the nominated waiting period. Income protection benefits begin after a predetermined waiting period (e.g. 30 days, 90 days, or two years) that you nominate when you take out the cover. Generally, a longer waiting period means a lower premium however it also means you’ll have to wait longer to receive your first benefit payment. The policy will continue to pay the benefit for as long as you remain unable to work up to a maximum predetermined period. This can be a set timeframe such as two years or age based (e.g. up to age 65).

Trauma insurance provides a lump sum payment if you suffer a serious, debilitating medical condition (as specified in the policy you choose) such as heart attack, cancer or stroke. Trauma insurance is designed to help people cope with the financial impact of a traumatic event as they recuperate. Generally, you will receive the trauma benefit provided you survive for a set period after incurring the condition.

It is important to note that different policies may have different features and you can access certain types of insurance through your super. Talk to your financial adviser for the most appropriate insurance to suit your individual and family needs.

When you consider your existing financial commitments and level of savings, how long could you be without an income before you would need to sell the house or change schools? The cost of premiums for any personal risk insurance policy reflects both the risk (probability) of an insured event occurring and specific features of the policy. Some typical risk factors are your age, the state of your health, your occupation and the type of recreational activities you participate in.

• the amount of benefit payable upon claiming

• the waiting period before benefits are paid

• how long benefits will be paid out for.

Before taking out personal insurance, consider the policy features carefully and seek professional advice.

Insuring through superannuation

Acquiring life insurance through your superannuation fund can provide some tax concessions which are not generally available for life insurance policies held ‘outside super’. For example, your superannuation fund may be able to claim a tax deduction for the life insurance premiums for life, TPD and income protection which can be paid for via salary sacrifice contributions (pre tax monies) and the contribution is generally only subject to 15% contributions tax. This could make it significantly cheaper (on an after-tax basis) for you to insure through superannuation. 

Not all types of personal risk insurance are available through your superannuation fund. New rules came into effect on 1 July 2014 that restrict the types of new TPD and income protection policies that can be purchased through superannuation, while new trauma policies are generally prohibited.

It is also important to notify your super fund that you want to keep your insurance in the event that your super account becomes inactive.

Tax considerations

Salary sacrifice contributions and personal tax-deductible contributions you make to super to fund insurance premiums (along with your other concessional contributions) are subject to the basic concessional contributions cap of $25,000 for the 2019-20 financial year (you may have a higher personal concessional contribution cap if your concessional contributions in any financial year since 1 July 2018 were less than the basic annual cap for that year). If you exceed your personal concessional contribution cap, the excess is effectively taxed at your marginal tax rate, plus an interest charge. When insuring through superannuation, if life insurance benefits become payable they attract a tax liability of up to 32% if paid as a lump sum to a non-dependant. However, where life insurance benefits are paid from super as a lump sum to a dependant, they are tax-free. TPD insurance may also be subject to tax if paid from superannuation as a lump sum.

Depending on your situation, you or your eligible beneficiaries may be able to receive life or TPD insurance proceeds as a superannuation income stream, in which case different tax rules will apply.]

Benefits for income protection acquired through superannuation are taxed at normal marginal tax rates.

The importance of policy ownership

Whether you are taking out risk insurance yourself, with your spouse or with a business partner, ownership of the insurance policy is an important consideration. There are different policy ownership options available. Each one can give a different outcome in certain circumstances. We recommend you seek professional advice on the structure that suits your goals and objectives.

Ways your financial adviser can help