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DevRaga Podcast Episode 5 – Protect yourself. Let's talk Personal Insurance

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Episode 5 – Protect yourself. Let's talk Personal Insurance

This is a summary of the Dev Raga Personal Finance Podcast - Episode 5: Protect yourself. Let's talk Personal Insurance.
The original podcast can be found here: Episode 5: Protect yourself. Let's talk Personal Insurance • A podcast on Anchor.

Please Note: The material on this site, and in the podcast, is purely for educational purposes only. It is not intended to be financial advice. If you need advice regarding your personal financial circumstances, please see a financial advisor or financial planner. Please read the full disclaimer here before participating in this thread.

Hi guys it’s Raga and in today’s episode I’ll be discussing personal insurance. We all tend to be distracted when things are all good when it’s fine, but what about in the event of a tragedy that could affect you and your family? Financially, it can be devastating and so it’s critical to think about contingency plans.

In a quick summary of the previous podcasts episodes;
  1. Pay yourself and the power of automation
  2. Mortgage tips and tricks
  3. Financial educators I listen to
  4. Asset classes and not be scared by the stock market
The Economic Cost of Sickness
So, you’ve started investing, saved up a lot of cash and have started to pay off your home using the mortgage tips and tricks I’ve spoken about. Now it’s time to start asking the somewhat morbid, but essential questions of what you would do should a family member or yourself fall ill. My career is all about treating patients that are sick – I focus heavily on their care, their treatment plans and their treatment goals. But more recently I have had to the think about the financial impact that such care can have on people’s lives because we are so focussed on getting the patient better.

Take this case study;
I was a surgical registrar at a large tertiary hospital in Melbourne. I had a patient who didn’t attend their post-operative appointment after they had major cancer excision surgery. Despite contacting the patient multiple times for follow up, each time the patient wasn’t able to attend. Some hospitals have a rule of three whereby if a patient fails to attend (3) appointments, they are discharged and it’s left to the GP to follow up. Turns out the patient did not have proper transport, could not pay taxi fees, didn’t have any family or friends that could have dropped them off. The financial barriers were not assessed.

How is it in a wealthy developed nation there are patients who simply cannot access essential treatment due to financial barriers. It’s not just an individual health workers responsibility – policies and procedures must be in place so that everyone can access the best healthcare possible.

Here’s where insurance comes into play. You’ve set up some great financial management strategies, but now you need some security to cover yourself and your family in the case of a tragedy. This podcast is not about the nitty gritty details of personal finance, but more broadly about the systems, the processes, the concepts at play to create a blueprint for your own financial planning. We hope that tragedies never happen, but so there’s no point sticking your fingers in your ears and denying that it ever happen.

In today's episode, I will delve into the types of personal insurance that are available and some of the key things to look out for when signing up for these insurance schemes. At times, this discussion can be morbid, but it is an important discussion worth having.

Life Insurance
The first is life insurance. It is applied in the case of death or diagnosis of a terminal illness and can be paid out to certain members that you opt for, usually your close family. Why would you get life insurance, you ask? As usual, it depends on your situation. If you have dependents (ie. don’t have an income) that may not be able to sustain a living without you supporting them financially, then that may be one reason. Alternatively, you may want it to provide some extra financial comfort for your family after you've passed away, even though you know your family would be able to live comfortably without your financial support. You need to ask yourself why you're getting the cover.

There is a medical check-up which assesses pre-existing illnesses before signing up. Really important to alert your GP that this is going to happen.

Premiums can come in either a stepped or level type;
  1. Stepped: payments increase as time passes so essentially "pay less now, pay more later."
  2. Level: won't increase later on so essentially "pay more now, pay less later."
Sometimes there are hybrid schemes which you can discuss with an insurance planner. Also ask your insurance planner about a CPI pay-out. Suppose you have cover for $1,000,000 – today’s $1,000,000 will be worth less in 10 years than it is today, so CPI ensures the buying power remains the same by essentially removing the depreciation of value caused by inflation.

It is also important to discuss exclusions, including (but not limited to) drug use, suicide, accidental death, or death due to natural disasters or terrorism. Sometimes life insurance doesn't cover occupational hazards which is particularly important in healthcare. For example, nurses and medical staff are at a much higher risk of contracting hepatitis or other blood borne diseases through needle stick injuries. Insurance agencies may exclude this from your policy cover, so this is important to discuss depending on your occupation. Also be wary of age limits; usually most policies expires at 65 or 70. Ask yourself the question; are going to be working until then?

Also consider whether you want to be your own insurance advisor - if you enjoy scrutinising policies, then you can do it yourself. But sometimes an advisor can help find out specific policies and read the find print to meet your own particular interests and needs. However, the banking royal commission has highlighted the dark sides of some advisors and their true interests may well lie elsewhere.

Basic principles of getting life insurance therefore come down to;
  • How much cover do you need and what is the main purpose of the cover?
  • Step vs level premiums
  • CPI indexation options
  • Exclusion criteria's
  • Age limits
  • Advisor vs self-advisor
Total and permanent disability (TPD)
Total and permanent disability cover applies where an incident affects your capacity to work permanently. This is in addition to the cover provided under life insurance, hence there is overlap. You have to ask yourself whether you want occupation-specific TPD, and to examine why this is important, I will use another case study.
Let's assume you have cover for $150k TPD and you work at a bank office. Part of being a bank officer is being able to liaise customers and work on a computer. You suffer a catastrophic stroke and are paralysed on one side of the body but are still able to speak and understand people. If you have occupation-specific TPD insurance, it will be likely determined you are not able to work at the bank normally. This would meet eligibility for occupation-TPD and you’d be pay out the $150k. However if you did not have occupation-specific TPD, the life insurance agency may in this case say while you may not be able to work at the bank, you could work as a telemarketer in a call centre, and thus you will NOT be paid out.

Understandably, occupation-specific TPD insurance often costs more than non-occupational TPD insurance. Non-occupational TPD insurance at it's most basic form typically covers not being able to do (2) out of the (5) activities of daily living (ie. having a shower, not being able to dress yourself). It is the lowest form of cover, and generally not recommended. However, as with all of these policies it all depends on your personal situation; your partners income and how much you have saved up.

Remember that TPD only covers for something that will remain throughout someone’s life. TPD is different from trauma or critical income cover or personal income insurance. The person must be permanently unable to work (occupation-specific TPD) or must be unable to perform 2/5 activities of daily living (in cases of non-occupational TPD). The TPD pay-out is also not tax deductible.

Income protection
Income protection is income being paid to you when you get sick and you can’t work. It is not when you are made redundant or lose your job. The income is taxable, like your usual income. The income works like a salary and is used to pay expenses for family, debt obligations, etc. As usual, there are the usual requirements, including stepped and level, age limits, exclusion criteria.

You also can’t get cover for more than 75% of your usual income (usual gross earnings). Most insurance plans cover if you get sick outside of work, because most workplace injuries are covered by workplace insurance policies, which is completely separate from personal insurance. Just check your insurance policy. Working in dangerous profession – higher risk for insurance companies. Check the fine print. Superannuation contribution is not obligatory for income protection pay-outs. You can however opt-in to this program.

Also, when you get sick consider other costs – rehab costs, other sources of income to cover for costs of living, business cover, carer costs, debt or credit obligations, personal homes, consumer debt, lifestyle expenses, utilities, education fees and so on. You must have enough income to cover all these other costs – via income protection or partner support. Assess your personal situation, and look at your personal behaviours and risk factors which may exclude you from cover including smoking, at risk behaviours, gender and age.

Note that the premiums for income protection are tax deductible. In contrast, TPD, trauma, critical illness trauma and life insurance policies are NOT tax deductible.

It is not a cheap policy and comes in a few different types;
  1. Agreed value
  2. Guaranteed agreed value
  3. Indemnity value
Agreed value and guaranteed agreed value means you’ve fixed the amount that is paid and depends on the amount you earn at the time you take out the policy. Indemnity value however can take into account last 12 months income or pick the best year of income over the past 3 years. Good income protection would obviously be to take out the best income made over the last 3 years. But consider the higher premium costs.

Consider another case study;
You signed up for indemnity value income protection with a plan that takes into account the last 12 months of income. You haven’t worked in the last 12 months for whatever reason and you get sick. In this situation, you may not get any money from income protection.

From this example, one should consider longer duration plans. They are the most expensive because it is the personal insurance policy that will most likely become active in your life. You are more likely to get sick than die from your sickness.

Trauma or Critical Illness cover
This insurance is where you get paid a set benefit for the diagnosis of a certain illness or illnesses. It is not considered as part of super.

In July 2018, this year 138,321 new diagnosis’ of cancer. Top cancers in 2017 was breast, colorectal, prostate, melanoma and lung. Risk of breast cancer by the age of 85 is 1 in 8. Hence, this insurance is really important, perhaps moreso than others insurance, as the chances from a mere statistical assessment are rather high for certain conditions.

Standalone vs Combined policies
That’s the four different types of policies. The last question you need to be aware is standalone policies vs combined policies. An insurance agent will likely try to sell you multiple policies, as they have a financial interest in doing so. I would try and haggle for a smaller price, especially if you're signing up for multiple policies.

Consider this;
You have 1 million dollars in life insurance, $100k in TPD and $100k in critical illness cover. If you claim $100k of your critical illness cover, then in a combined cover policy, the insurance agency may minus that $100k from the life insurance cover, leaving 900k there. A standalone policy would mean you maintain your $1m irrespective of the pay-out from your critical illness cover.

When haggling (especially when you’re likely to be getting insurance for your partner, family or friends with numerous plans being requested) you possess some buying power that should give you some leverage to ask for at least a 10-25% discount on those plans.

So in conclusion, you’ve followed the pay yourself first method, you’ve diversified your income, diversified your investments and controlled your consumer debt. Now it is all about protection for you and your family. Your personal insurance is paramount. Working in the medical field, I deal with injuries and tragedies all the time and it’s made me realise how critical it is that I should protect myself and my family should the roles be switched, and I end up where my patients are sitting.

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