Australians generally have a love-hate relationship with insurance. The first image many of us have when we hear the word insurance, could be a stack of policy documents hidden in some drawer (possibly along with your superannuation statements): out of sight, out of mind. That’s assuming you have any in place, as it is sometimes deemed too expensive and too troublesome for something we might not even use.
But what if we told you the following:
- About 400 people in Australia are diagnosed with cancer every day1
- About 100 Australians have a stroke every day1
- One Australian is hospitalised for coronary heart disease every 3 minutes2
- Nearly 1 in 2 Australians aged 16-85 had experienced a mental disorder at some point in their life3
All of the above examples have one thing in common: Once it happens, it will significantly impact your ability to earn an income, enjoy life or build a better future for your loved ones. This is where having insurance plays a large part in financially protecting you.
However, due to the perceptions of cost and a false sense of security mentioned earlier, we now have a situation where 83% of Australian car owners insure their car, but only 31% insure themselves or their income!4
Let us run through some of the key concepts of insurance, as well as what to consider if you want to apply for insurance cover while living and working as an expatriate overseas.
What is insurance?
Insurance is merely a tool that creates cash immediately, nothing more, nothing less5. It gives you the ability to still maintain your lifestyle and account for medical costs in the event you suffer a disability/trauma event. In the event of death, it provides a nest egg to financially stave off the impact of you no longer being able to provide for your family.
Types of insurance
The main types of insurances include:
- Term Life: In the event of premature death
- Total & Permanent Disability: In the event of being totally and permanently disabled
- Trauma: In the event of critical illness
- Income Protection: In the event of accident and/or illness
How much to insure?
One challenge a lot of us have when it comes to insurance, is quantifying how much you need to insure. Some rules of thumb to assist are:
Basic variables including family living expenses, any liabilities you want to extinguish, and children’s education (and for how long). The idea is to leave a lump sum enough to maintain your family’s living expenses, without burdening them with debt.
Total & Permanent Disability (TPD)
If you become disabled, you not only lose the ability to earn income, but there are also medical expenses you need to account for. Your family living expenses and debt repayment still needs to be considered, now on top of any medical costs. Note that your private health insurance may account for a portion of your treatments, so it’s important to know and understand what you are covered for. Any gap can be included in the TPD calculation.
Trauma cover will pay a benefit if you suffer a critical illness/serious injury. The main difference with TPD is that the illness may not be permanent in nature. Hence having a full year’s worth of income covered is a good starting point, along with additional medical costs (outside of what is covered by your private health insurance).
This is more straight forward as the consideration mainly evolves around what percentage of your income you want to cover (maximum is 80%), the waiting period is before first payment (from 30 days up to 2 years) and the length of the payment period (2 years to age 65).
How much is it going to cost me?
The cost of insurance is one of the main reasons why many hesitate to consider having cover in place. Some aspects you need to consider are:
- Amount of Cover: The more cover you need, the higher your premium.
- Underwriting: Your premium is also determined by your health, and whether you have any pre-existing medical conditions.
- Actuarial: Variables such as age and gender will also play a part in determining your premium amount.
- Tax benefit: Premiums for certain types of insurance may be tax deductible against Australian income i.e. rental income.
- Super: Structuring insurance through your superannuation can sometimes be a way of funding premiums without affecting your cash flow.
|Tip: Given the different considerations involved, going through a Financial Needs Analysis with an adviser would be helpful in determining and guiding you through appropriate types and levels of cover as well as considering your funding options.|
Local insurance or consider an Australian based cover?
For those living overseas, there are options for local insurance policies. The insurance market in Hong Kong, for instance, is highly regulated and there are a variety of products you can consider. It is worth comparing local based cover with an Australian based policy.
Unbundled vs Bundled
Be wary of local long-term saving plans masquerading as an insurance policy. If your intention is purely to have insurance cover, then confirm that it is a standalone insurance policy without any lock-in periods or savings obligations.
Empirically, Income Protection insurance is not commonly found in Asia, in the version that we’re accustomed to in Australia. What’s more, you can claim your income protection premiums from an Australian base policy, as a tax deduction for your Australian tax returns.
Most Australian providers will require you to ultimately return to Australia for treatment or assessment of claim. However, there are Australian insurance companies that allow you to remain overseas in the event of a claim.
Being underwritten and accepted for cover as early as possible is often desirable to ensure you are eligible for cover, in the case of a future health event. If your intention is to move back to Australia, it may present an undesirable situation if you are unable to apply for replacement cover upon your return due to a health incident or the like. This can leave you with cover held overseas which may not be ideal for your situation.
Further to this, if the intention is to return to Australia, going through the underwriting process once with a provider in Australia is also often the best outcome, rather than having to repeat this process upon repatriation.
Depending on your situation and estate planning arrangements in place, it may offer an advantage to simplify your risk protection policies in one jurisdiction. Death benefit nominations where applicable for your insurance policies are also important.
In summary, insurance should always be a part of your financial plans. The perception of it being too costly for something we won’t use is misleading at best, and the probability of suffering a health event is higher than any of us would care to think. Should misfortune happen, insurance is genuinely good value for money, comparing the much higher amount of benefit gained with the premium paid.
Contact us if you require any insurance advice.
1 Australia’s health 2020: in brief, Australian Institute of Health and Welfare
2 Data & Statistics, Heart Foundation 2020
3 The 2007 National Survey of Mental Health and Wellbeing, Australian Bureau of Statistics
4 Source: lifewise.org.au
5 Ben Feldman (1912-November 7, 1993)