Handling insurance in uncertain times
“Times are a bit tough right now, so we’re cutting back on the non-essentials. I’m thinking of dropping my life insurance – because I hope I don’t need it! – and picking it up again when times are better.”
While it’s tempting to think of life insurance as a “non-essential”, it’s not. If you think you can’t afford the premiums, look at it this way: you are so reliant on the income you do have, that you need to sustain it! That means, your life insurance premiums are essential, not discretionary spending.
Having life insurance doesn’t mean you’re going to use it; but if the worst does befall you, your family’s future won’t crumble.
There are various strategies to save money and keep your life insurance in place.
Very smart super
Superannuation can provide the perfect solution. The super guarantee contributions, or an existing account balance, can fund insurance through superannuation, without you finding extra money.
This is useful, but it’s a temporary measure. When you can afford to add insurance to your budget, consider other alternatives so your super retirement savings are not adversely impacted in the long term.
Existing account balances grow over time, and, with investment earnings accumulating, the super account can be used to also cover insurance costs. This can be particularly useful if you’re older, and find your premiums-for-age increases unaffordable if they’re coming out of discretionary savings.
However, before using a superannuation strategy, you (or your adviser) will need check the tax treatment of benefits, insurance coverage and access to benefits, because it may differ to policies held outside super.
If you earn less than $60,342 a year, and make a personal after-tax contribution to superannuation, you may receive a government co-contribution.
Together, these could be used to fund insurance through your super, with the government effectively paying some of the premiums.
The co-contribution paid depends upon your income and the amount you contribute. Subject to thresholds, for every dollar you contribute, the government will contribute $1.50 up to a maximum of $1,500 (for 2008/09). In the last federal budget, this was reduced to a maximum of $1,000 for 2009/10.
If you’re self-employed, you may be eligible to claim a tax deduction for contributions up to the relevant concessional contribution cap ($50,000 for the 2009 financial year). You may also be eligible for a government co-contribution if you make a non-concessional contribution.
You could also use these two strategies in tandem.
If you’re an employee looking to reduce insurance costs, then salary sacrifice can come in handy. By having insurance in superannuation, clients can pay for premiums using before-tax dollars via salary sacrifice, which can deliver significant savings.
To do this, you need to make you have an effective salary-sacrifice agreement in place where salary sacrifice payments are prospective. It is a good idea to firstly check you can salary sacrifice and that your super guarantee contributions won’t be affected.
You’ll also need to be of the announced reductions in the concessional contributions cap to $25,000 for 2009/10 and following. The transitional cap (until 2011/12) for those members aged 50 and over will also drop to $50,000.
Fund it from last year
Generally, it costs about 8% less to pay life insurance premiums annually, than what the 12 monthly payments add up to.
Income-protection premiums are deductible, so the net premiums are even lower.
Use your previous year tax refund to help finance the current annual premium.
Tailor it
Adding new insurance policies over time can mean several stand-alone policies – and this can be more expensive. Bundling life insurance, total and permanent disability and trauma cover can save you money without sacrificing any cover. Most people can save between 10-15% by bundling cover.
Another option to explore is to increase the waiting period on any income-protection policy. Instead of reducing cover, increase the waiting period on your new income-protection policy from 30 days to 90 days. This simple change could cut the premiums some 30%.
However, before jumping at this strategy, make sure you can support yourself over the extra 60 days! Think about any accrued, paid leave (sick or annual), or if you can draw on liquid assets, such as savings. You’ll need to consider that if you sell shares or other assets, there may be adverse tax consequences (such as capital gains tax), while other options such as drawing on home equity could incur costs.
Another approach that can reduce premiums is having “minimum cover”, where you cut the sum insured to only cover your most important financial commitments.
Help if involuntarily unemployed
If you become “involuntarily unemployed”, there are several insurance policies in the market now that will waive premium payments for up to 12 months.
Some income-protection policies even go as far as covering bank repayments (home loans, margin loans and business loans) for up to three months.
Up in smoke
If you’ve given up smoking for at least 12 months, you may be eligible for non-smoking rates, which can deliver significant savings – potentially more than 35%. A “non-smoker” has not smoked tobacco or any other substance, or used a product containing nicotine, for at least 12 months.
If you say you are now a non-smoker, the insurance company may ask for a further test to confirm “non-smoker status”, as well as confirming the reason you stopped smoking was not due to health deterioration or a diagnosed medically related condition.
Healthy body, healthy bank balance
It is widely accepted that obesity is linked to increased risk of cardiovascular disease, diabetes, sickness, disablement and premature death.
Body mass index (BMI) is used to identify obesity (the calculation is weight in kilograms divided by height in metres and again divided by height in metres). For a BMI of 32 or greater with a personal or family history of disease, or a BMI of 36 or greater, insurers may impose loadings that recognise these extra risks. Generally speaking, medical loadings tend to be 50% or higher, so are a hefty increase on your premium.
Twelve months after reducing your BMI, you can apply to reduce these loadings. So a healthy BMI really does equate to a healthy bank balance!
BMI is one example, but loadings can be removed for other improved health conditions – for example: blood pressure, asthma and even some cancers – or when you no longer participate in certain hazardous pastimes.
Think before you act
While this is always sage advice, in this situation it means you don’t need a health reassessment if you drop your insurance, then wish to take it up again.
Insurers assess your riskiness according to your circumstances when you apply. Once accepted, covers are generally guaranteed renewable without ongoing health assessments.
A risk in letting insurances lapse is that, due to changes in health or occupation, cover may not be available (or affordable) when you decide to reinstate them. This could also be an issue if you want to move your insurances inside super.
So always consider your future insurability before changing or lapsing current arrangements.
It’s all about priorities
Many Australians insure their car, but not the “engine” that enabled them to buy it in the first place – themselves!
You need to protect yourself first, because your income is your biggest asset – and the means to buy other assets.
It’s a sad fact that many Australians will receive more insurance money for their damaged car than for themselves after a major motor vehicle accident. Happily, insuring yourself can sometimes cost less than insuring your car.
And, income protection is generally tax deductible.
So while it’s tempting to think you’re not planning on using your life insurance, it’s during times such as the global financial crisis, that many people become acutely aware of how important it is to protect their assets.
Life insurance is the key to protecting yourself – and really, you are your most important asset.
Source: “Insurance strategies in uncertain times”, by Jeffrey Scott, business growth services executive manager, Commlnsure.
Tags: financial protection, Insurance