Money Matters Monday 12th March 2018
Paying for Personal Insurances
It is often the case that the people who most need life and personal insurance are the ones who can least afford it. Life, disability and income insurances are designed to pay mortgages and other debts, meet loan payments and fund the cost of raising children to independence, if a disaster occurs, and they can be a significant cost.
Insurance is expensive, but there’s a solution
The people who most need the cover are those with large mortgages, car and personal loans, and several small children with many years and big expenses ahead before they reach independence. These younger parents would be unable to manage a death, disablement or prolonged illness without insurance.
Yet they haven’t had many pay rises or promotions yet, and have large loan payments to meet, so they often have trouble finding enough money to buy lunch, let alone a large insurance premium every month.
Pay insurance from your super
One possible solution for those needing insurance who can’t afford it is to see if they can arrange for some of the cover they need to be paid for by their super fund. Death, disablement and income insurance can be bought within super funds, though trauma insurance cannot.
Paying the premiums from super conserves cash. Also the super fund gets a tax deduction for premiums, reducing their cost. Death and disablement cover are not deductible when bought personally, though income insurance premiums are.
Besides trauma insurance the other type of cover that cannot be bought in super is disablement insurance for your own occupation. Most super funds provide optional insurance and some even give a level of automatic cover, but it will only pay out if you are no longer able to perform any occupation.
The much better disablement cover is the type that will pay if you are unable to perform the important duties of your usual occupation. So, some of the insurance cover needed will have to be paid for personally, but the majority can usually be purchased by one’s super fund.
Using salary sacrifice
Insurance companies have developed linked policies which provide one package of cover but have perhaps three quarters of the premium paid by the super fund and one quarter by the person individually.
This is a very attractive option for cash-strapped young parents but it has one drawback. The insurance premiums paid by the super fund will mean the super balance doesn’t grow as much as it normally would, and it could even decline.
With this in mind, it is best to try to put some extra money into super by salary sacrifice to help meet the insurance premium costs. It may be a balancing act to decide what insurance is essential and how best to pay for it. Financial advisers can help work out the optimum personal solution.
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