Insurance. Boring, innit? Sometimes I sit there and think, you know what, I’m gonna get my shit together. I’m gonna get health insurance, life insurance, flashy home insurance, AND protect my income and all my devices. Yeehah, aren’t I an adult. A few quotes later I’m backing away slowly and deciding that nah, that’s way too expensive. I know who can handle this – future me. What a champ.
But deep down, we all know we really should be considering insurance. In our defence, insurance is pretty complex, and nobody really has a set answer on what’s worth it and what’s not, or what insurances young people should consider first.
I spoke to financial adviser Shaun Albert to get some answers on our greatest insurance woes.
As always, information in this article is general in nature and is not tailored to your personal circumstances.
What insurances should we be considering?
When it comes to insurance, there are three major types that we really should be at least considering. Life insurance, TPD (Total Permanent Disability), and Income Protection Insurance.
“Insurance is generally overlooked by young people,” explains financial advisor Shaun Albert, noting that we seem to have a bit of a “nothing will happen to me” attitude when we’re young. “Any expenses we don’t think we need, we don’t want to pay.” Damn right. What Shaun has noticed, though, is when people put value on things, then we’re happy to insure it. “Take phones, for example,” he said. “We’re happy to pay for that, because we don’t want to drop $400 on a new screen.” So, why aren’t we seeing our lives as insurable as our phones?
My argument was that poor wage growth priced lots of us out of several types of insurance – not to mention the fact that we have no real clue what kind of cost we’re looking at. Add that to the fact that we might pay all these premiums and never even make a claim, and it’s no wonder we’re not that into insurance. “Look, nobody wants insurance, because it’s only a what-if,” Shaun agreed. But, when you’re playing bigger in your life, with kids, a mortgage, perhaps pets or an investment property, you begin to understand the high stakes. If you’ve got an $800,000 mortgage that’s dependent on two incomes and you *touch wood* pass away while you’re young, how will your spouse and potential children survive paying a big mortgage? If your life insurance could pay out that mortgage, that whole issue goes away.
“For $1million of life insurance when you’re young and healthy, you could be looking at, say, $500 a year.” Shaun explains. Ok, great. Finally a ballpark. But, this rate won’t last forever.
“That $500 a year could have jumped to $5,000 a year by the time you’re in your mid-30s.”
The reason is, life insurance is cheaper when you’re younger, because your risk tends to be lower. The older you get, the more your risk profile increases, and the more likely you are to have health conditions.
Shaun explains there are two types of premiums when it comes to life insurance. Level premium, or step premium. Level premium means you pay more now, but retain that amount for the lifetime of your policy – which is great if you lock in a level premium when you’re young, as it could stop you paying exorbitant premiums as you age and become more of a claim risk. Step premium means it’s cheaper today but will increase with time. The ‘right’ choice differs from person to person, as so many things go into your risk profile – family history, health conditions (even minor ones), and age to name a few.
“You can pay life insurance through your Superannuation,” Shaun says, though those premiums being deducted are taking away from potential compound returns.
Income protection insurance
Alright, so how about income protection? Income protection basically protects your income – duh – if you became unable to work for a number of reasons.
“With income protection insurance, a lot of people say their parents would support them if they couldn’t work,” explained Shaun. “That’s fine if it’s a couple of months, but what if you wind up in an accident and out of work for two years.” We’re forgetting that accidents, illness or recessions *gulp* can see us out of work for a lot longer than a few weeks. Income protection insurance could replace your salary while you can’t work.
Alright, sounds good, sign me up. But wait. How much does this nifty protection cost?
Don’t worry, I probed Shaun for that, too.
“For an income of $75K, we’re looking at maybe $1200 a year,” he said, “though that depends on your job role and risk. Everyone’s different – an office worker is lower risk than trades, for example.”
It’s worth noting that income protection insurance is also tax deductible – bonus!
Being a millennial and wanting quick solutions and clear answers, I pushed Shaun for his take on which insurances are necessary and which are ‘nice to have’. “Look, there’s an argument for life insurance and TPD”, he said, as those are the ones that have really high values attached to them – and y’know, because death is guaranteed at some point.
Life insurance perks
Right, ok, life and TPD. Good starting point. Being millennial once again, I wondered if there were any more instant perks to life insurance, since I won’t get to enjoy the payout, because I’ll be er, dead. “Different insurers offer different things at different times, but there are fairly innovative programs out there that reward you for being healthy.” And he’s right. Discounted gyms, bonus frequent flyer miles, gift cards – there are lots of perks you can get from your insurers.
But hang on, don’t we have these insurances as part of our Superfund plan? Shaun warned that superfund policies are very complicated, and sometimes what you thought was enough as a young person turns out not to be enough when the time comes. $500,000 of life insurance might sound like a small fortune when you’re 23 and renting, but once you’re 45 with two kids and a mortgage, it might not cut the mustard. “Check your policies carefully and read the terms and conditions,” he said, speaking of a scenario in which a dual life insurance and TPD policy effectively cancelled each other out. “Some people think they’re covered with life and TPD, but once they’ve claimed on the TPD, the life won’t pay out.” Yikes.
Can an adviser help me?
Ok, this is getting complicated – which is why financial advisors have a job. So, can they help us regular folks? “Yes, but not every adviser will do it.” Unfortunately, changes to the financial advice system means it’s harder than ever for advisors to make one-off statements of advice for the average income earner viable. “Some will do it, perhaps for a flat fee of around $1100 or something like that”, Shaun said, but explained that often these services run at a loss for the adviser. It’s all about finding the right firm that can do it.
NB: I am in the process of sourcing a network of financial advisers who can help us regular young folks that don’t have a bazillion dollars to play with. I want you to be able to find the professional contacts you need to sort these types of things for you, and I’m workin’ on it!
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