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Thursday, 22 March 2007

Life Insurance

One of the things financial planners will always review is your life insurance cover. Not everyone needs life insurance of course - and not everyone is able to get the amount of cover they need at a reasonable cost. In Australia life insurance is often best value when the policy is taken out within your superannuation (retirement) account, as the premiums will be paid from money that has been concessionally taxed (usually at 15%), rather than at your marginal tax rate (of up to 40% or more). Another benefit of getting your coverage through your superannuation fund can be cheaper rates - if you are part of your employer's superannuation plan, the life insurance is often at cheaper "group" rates than you could obtain outside of super. Often the maximum cover available without having to have a medical exam is quite generous too. I have $400K of death and "total and permanent" disability cover (there are several different types of cover possible). Its basically term insurance, guaranteed renewable until age 65, with the premiums based on sex and whether or not you're a smoker. The premium increases each year with age, and with generally rises in insurance costs (although the amount of cover remains fixed, companies will increase premiums across the board as life expectancies increase).

One consideration for me when starting up a self-managed superannuation fund (SMSF) will be whether it's worth keeping my existing employer's superannuation fund account open with a small balance, just so I can retain my existing insurance. Although the management fees are proportional to the balance (and thus won't be an issue), there is a small monthly account keeping fee which would add to the cost of retaining my existing insurance cover. I'll probably keep my existing cover while I get my new fund setup, and not close it until I have got quotes for a new insurance policy with the same benefits, and had my application accepted (it will probably require a medical exam). It would probably be worth keeping the existing super account open just for the insurance if I can't get a new policy - the annual account is only around $50, and I should be able to save at least $1000 pa in reduced fees by moving the bulk of my superannuation into a SMSF.

I mainly have life insurance to provide for my family if I die. As the death benefit will be added to my retirement fund balance and other investments, the amount of cover needed should decrease over time - so I can probably keep the cost of insurance fairly constant by decreasing the amount of cover as I approach retirement age.

In addition to Death and TPD insurance, I also have a "loss of income" policy that will pay 85% of my salary until 65 if I am disabled. It differs from TPD insurance in that there is a "waiting period" that applies before you start being paid a benefit if you are disabled. The premium is less for longer waiting periods, so I choose a 2-year waiting period in order to minimse the cost. I have significant annual and sick leave accumulated, plus enough assets to see my through this period without any income. This type of insurance is tax-deductible if obtained outside of super, so it's usually best to obtain these policies outside of super (ie. paying the premium with your after-tax dollars).

Online comparison tools are very useful for comparing rates available from different providers for different policy types and conditions. It's very important to consider the strength and reputation of the provider, and the "fine print" of the cover, when comparing prices, to ensure you are comparing apples with apples. One site available for comparing life insurance policies in the US is Life Quote Centre.

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