Chapter 08 – Case studies

Ravi and Jane, married couple

Ravi (43) and Jane (45) are both married with two children. The kids are aged 11 and 14. Ravi and Jane owe $300,000 on their mortgage. Ravi works full time as an administrator earning $80,000 per year. Jane works part time in retail and earns $20,000 per year.

Life Cover and TPD

Both Ravi and Jane should have life cover. For Ravi, the minimum cover should be $500,000. This allows Jane to pay out the mortgage and also have an extra $200,000 with which to finish raising the children. For Jane, the minimum cover should be $300,000. This will allow Ravi to pay out the mortgage.

Ravi and Jane should insure for the same amounts of TPD as they do for life cover.

Income Protection

The family is heavily dependent on Ravi’s income. He needs income protection cover.

Trauma

Ravi and Jane both have private health cover. They decide that this cover will pay for any medical expenses associated with an experience of trauma. They also decide that Ravi’s income protection policy will address any lost income flowing from a trauma experienced by Ravi.

However, because the couple are not insuring Jane’s income, they do decide to take out some trauma insurance for her. If Jane were to need medical assistance, Ravi might need to take time of work to assist her. The trauma cover will pay for the income lost as a result.

Business insurance

Both Ravi and Jane are employees. They do not need business life insurances.

Costs

The likely premiums for Ravi and Jane are as follows:

Person Insurance Type Range of premiums (depending on choice of insurer)
Ravi $500,000 life and TPD
$5,000 per month income protection (30 days waiting period)
$2,591 –  $3,408
Jane $300,000 life and TPD
$50,000 trauma
$459 – $679
Combined   $3,050 – $4,087

Alternatives

Ravi and Jane are in the peak cost years and total premiums of at least $3,050 are a big hit on their finances. As an alternative, Ravi and Jane might make the following changes:

Ravi increases the waiting period for his income protection from 30 days to 90 days. This change alone will reduce the total premium paid by around $700.

Ravi also chooses to take out life cover through his superannuation fund. The cost is about the same, but the premium is paid out of Ravi’s superannuation benefits, meaning that the family’s cash flow is not strained. This reduces the out of pocket expense for Ravi’s insurance to somewhere between $1,164 and $1,832. This is the premium for the income protection cover. This premium is tax deductible. Ravi pays tax at the rate of 30%. So, the after-tax expense out of pocket expense for Ravi falls to somewhere between $815 and $1,282.

Combined with Jane’s premiums, the family is now paying between $1,274 and $1,961 out of their personal cash flow in the first year.

Mark and Phuong, couple with no children

Mark (29) and Phuong (27) are a de facto couple with no children. Mark is an accountant earning $80,000 and Phuong is a school teacher earning $70,000 per year. They are currently saving for a home deposit and intend to start a family within the next five years.

Life Cover and TPD

At this stage, Mark should have life cover. This is because there is a chance that Phuong will become pregnant and, if she does, the costs of raising children will commence. An amount of at least $300,000 should be contemplated for Mark. He also needs the same level of TPD. Phuong potentially has less need for life cover. However, the premium for ‘stand alone’ TPD of $300,000 is only around $100 per year less than it would be for life cover with combined TPD. Therefore, Phuong decides to get joint life cover and TPD for $300,000.

Income Protection

Given they are saving for a deposit and looking to start a family, both Mark and Phuong need income protection cover. Given they are both saving, they decide to take the 90 day waiting period option.

Trauma

Neither Mark nor Phuong have private health cover. However, given that they are both young they are happy to take their chances with the public health system in the event that they need medical assistance. They also decide that their income protection policies will address any lost income flowing from a trauma experienced by either of them. They do not take out trauma cover.  

Business insurance

Both Mark and Phuong are employees. They do not need business life insurances.

Costs

This table shows the initial cost for Mark and Phuong’s insurances.

Person Insurance Type Range of premiums (depending on choice of insurer)
Mark $300,000 life and TPD
$5,000 per month income protection, 90 day wait
$721 – $1,032
Phuong   $300,000 life and TPD
IP of $4,375 per month, 90 day wait
$1,080 – $1,780
Combined   $1,801 – $2,812

Comments

If and when Mark and Phuong take on a mortgage and especially if they start a family, they should increase the amounts of life cover and TPD for which they are insured.

Jasminder, single mother

Jasminder is a 40 year old single mother of three school-aged children. She works part time as a school administrator. Her income is $25,000. She also receives Centrelink benefits and child support from the children’s fathers. She has a mortgage of $220,000.

Life Cover and TPD

Jasminder needs life cover and TPD. Cover for an amount of $220,000 will ensure that there is a home for her children to inherit should she die. 

Income Protection

Given her income, there is little need to insure her income. Jasminder would receive an increased Centrelink benefit were she to become unable to work.

Trauma

Jasminder cannot afford private health cover. She would be seriously inconvenienced were she to require medical treatment – she would be completely reliant on the public system. 

Business insurance

Jasminder is an employee. She does not need business life insurance.

Costs

This table shows the initial cost for Jasminder’s insurances.

Person Insurance Type Range of first-year premiums (depending on choice of insurer)
Jasminder $220,000 life and TPD $391 – $464

Alternatives

As a single mum, cash flow is tight for Jasminder. If she decides that she cannot afford this sum insured, then she could explore taking the life and TPD cover through her superannuation fund. The premiums will be similar, but they will be paid out of her superannuation benefits and therefore will not affect her day to day cash flow.

Unfortunately, only one insurer is prepared to provide standalone trauma cover, and the premium is $300 per year. If Jasminder decides to use superannuation to pay her life and TPD, she will probably need to decide not to take any trauma cover at all.

Brett, single man aged 24

Brett (24) is an electrician earning $60,000 who has just taken out a mortgage of $400,000 to buy his first home. He has a friend living with him and paying him $150 per week. His parents have guaranteed his loan and helped out with the deposit. Brett is not in a relationship. Brett is a smoker.

Life Cover and TPD

Brett has no financial dependants. If he dies, no one will suffer financial loss. He does not really need life cover. Given he has a mortgage, Brett should consider TPD cover. The amount should at least pay out his mortgage, but should also perhaps leave him with some extra money to finance any modifications that he may need to make. An amount of $600,000 makes sense.

Income Protection

Brett should also insure his income. Again, because he does not have any dependents, he should consider a longer waiting period so as to reduce the premium. He could probably cope with a period of 90 days without income – perhaps by relying on his parents for some temporary support.

Trauma

Given the income protection and TPD, Brett is insured against a loss of income stemming from a trauma. He decides that he does not need to insure against the cost of medical expenses.

Business Expenses

Brett is an employee. At the moment he does not need business insurances. However, as a tradesman he may well become self-employed in the future, at which time business expense insurance will be worth considering.

Costs

The following is an indicative view of Brett’s insurance premiums:

Person Insurance Type Range of premiums (depending on choice of insurer)
Brett Income protection, $3,750 per month, 90 day wait $1,345.68
Brett $600,000 TPD $651
Total   $1,996

Alternatives

Brett is a young man many years from retirement. He could consider using his superannuation fund, into which his employer makes mandated superannuation contributions, to finance the TPD cover.

Another alternative that Brett should consider is giving up smoking. Were he a non-smoker, the same policies would fall to $1,596 a year. Essentially, smoking adds $400 per year to Brett’s insurance costs. (The ciggies no doubt cost a lot, as well).

As Brett gets older, partners and probably starts a family, he will need life cover as well. 

The Dover Group