Work Out What Your Life's Worth
Newcastle Herald
Thursday September 21, 2006
THE tragic death of Steve Irwin is a grim reminder that the future is promised to nobody. Sure, we may have pushed average life expectancy past the 85 mark, but accident and illness still do strike suddenly, and without respect for age or assets.
This leads to the vexed topic of life insurance, a subject to which most of us have a rather illogical reaction. We don't want to know about it; we avoid it, and yet when tragedy strikes we almost always wish we had taken out more.So who needs it, and how much is appropriate? The first question is simply answered by asking what would happen if the breadwinner died, or was unable to work due to a serious accident or illness? Obviously if you are single and living at home, or you have relatively small debts and a partner with a good income, you probably have no need for life cover. But if you have a large mortgage and dependants, you should be asking just how much is enough. It is almost certainly going to be more than you think. As an example, think about a couple in their mid-30s with children aged 14, 10 and eight. He earns $65,000 a year, and she earns $10,000 from casual work. Their debts total $200,000. If he were killed, or became totally and permanently disabled (TPD), the family would have problems coping financially without adequate life insurance, which would need to be at least $1.3 million. Staggering, isn't it? But it comprises $200,000 to pay off their debts, $1 million to give the family an income to replace what he used to earn, and $100,000 to establish a fund for the children's education. There is no point relying on her going back to work as she will probably prefer to be with the children to help them through the hard grind of the teenage years.A larger sum would be needed if he became totally and permanently disabled. The home may need to be modified for his special needs, and there could be heavy ongoing costs for nursing care.What is the most tax-effective way to take out life insurance? Through superannuation if the premiums are paid using salary sacrifice they are effectively tax deductible and for most people the benefits on death are tax-free. Also, by taking out insurance through your superannuation fund you can enjoy cheaper premiums, as the large superannuation fund managers buy insurance wholesale and pass the savings on. The cost of premiums is relatively small when you are young, particularly if you are a non-smoker. If he was aged 36 next birthday the cost of $1.3 million death and TPD cover is $800 a year, but the real after-tax cost is only $548 a year if the salary package was arranged so the premiums were paid with pre-tax dollars. That's just $10.53 a week. There is also insurance available that pays a lump sum on the diagnosis of a serious illness. Fortunately most people recover from these illnesses and so, unlike life insurance, get to spend the proceeds of the policy while they are still alive. Imagine what a difference a lump-sum payment of, say, $100,000 could make to the life of a person who has just been told they are suffering a life-threatening disease? It could alleviate the pressure of home repayments by paying out the mortgage, or at least provide a huge buffer so that payments could be maintained. It could enable the partner to take time off work without pay during the treatment process, and also provide funds for additional medical costs or changes in lifestyle or occupation that may be caused by the illness. Insurance is a specialised topic and there are many other types, such as income replacement, to consider. This is obviously a matter for you and your adviser. What today's example shows is that it need not cost more than a few dollars a week to enjoy peace of mind.Noel Whittaker is joint managing director of Whittaker Macnaught Pty Ltd, AFSL Number 246519. Email noelwhit@gil.com.au. This advice is general in nature and readers should seek their own expert advice before making financial decisions.
© 2006 Newcastle Herald
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