You need to think about the types of risks you could face and the financial strain they can put on you and your family if they occurred.
Below I have outlined the main types of personal insurance. I have often found that people struggle to understand in what situations they may need the different types of insurance so I have put an example below each. In some case studies there was good cover, one where there was no cover and one where there was not enough cover.
Life Insurance:
This is when you depart this world too soon. Usually referred to as life insurance, a lump sum is payable to your policy owner or joint owner if the policy is jointly owned.
It could be used to eliminate any debts you have, pay off your mortgage, cover funeral costs, pay for the future education of your children and provide an income for your spouse and family.
There are two main types: endowment and whole of life policies which have higher premiums because they have a savings component to them. I am not a big fan of these policies because insurance and investment are quite different and I don't believe they work well in the same product.
The second type of life insurance is term life. This is simply a set amount of cover for a set time period and is cheaper than endowment policies because there is no investment component. 'Whole of Life' is often referred to as bundled policies, and 'Term Life' unbundled policies.
Example: Geraldine and Simon and their three young children were living a comfortable life. They had a lovely house in the country, Simon had a great job with a good salary and Geraldine ran a part-time business from home. One day, at the young age of 43, Simon had a sudden heart attack and died. They had life cover in place but unfortunately it was only enough to just cover the mortgage. Geraldine, faced with her own grief and looking after three small children who had just lost their father, was finding life a real struggle. Unfortunately, unless she got the business running again they would have no money to live on. Geraldine was regretting not taking the advice of their risk broker and increasing the amount of Simon's life insurance.
Income Protection:
Also known as disability insurance and is one of the important types of insurance as it gives you the ability to insure one of your most valuable assets; your ability to earn an income.
For example, if you earned $50,000 per annum and are now aged 40, your future income is $1.25m (25 years x $50,000). It is the potential loss of this income that an income protection policy is insuring; a monthly income is paid to you if you are not able to work due to an illness or injury.
Your policy will have a waiting period of 4, 8 or 13 weeks, chosen by you, before any income is paid. You are able to insure up to 75% of your taxable income under most income protection policies. Your ability to earn an income is one of the most valuable assets you have.
Example: At 47, Claire had it all - a high-powered career as a human resources consultant and a young child she adored. However Claire realised that as the sole income provider she and her daughter needed some security in case she was unable to work. Just two years later, a mammogram revealed that Claire had cancer. Through her Income Protection policy she received a benefit of $3,200 a month. This benefit provided Claire with financial help so she could stop worrying about money and concentrate on getting well.
In the next article we will look at other types of insurance.