Personal Risk Management

Personal risk is the exposure to financial loss and additional expenses resulting from premature death, disability or critical illness.

Your family may suffer financial loss as a result of the death or disability of an income earner.

Additional expenses may be incurred from the death or disability of a homemaker, such as the cost of child care which previously wasn’t required.

Disability and critical illness can result in additional expenses, such as specialist treatment, equipment or home modifications.

For these reasons, careful consideration must be taken to assess your risk exposures and manage them.


Risk Transfer

One of the most effective risk management strategy is to transfer the risk through insurance policies.

Here are the various covers available.


Life Cover (term)
It provides a lump-sum payment to the policy owner or nominated beneficiaries in the event that the life insured dies while the policy is in force. In many cases, an advanced payment is made if the insured is diagnosed with a terminal illness and has a life expectancy of no more than 12 months. The policy does not accumulate cash value, and hence there is no surrender value.

Most policies are guaranteed renewable until the age of 99, but in reality, once the insured reaches an older age, the premiums tend to increase exponentially each year, with the result that most retirees let the policies lapse.

The most common use of term life insurance is to financially protect the life insured’s family should the insured die prematurely. This is often done by selecting a level of cover that is sufficient to pay off any existing debts and/or provide an investment amount to generate a future income stream on which dependants can live.


Total and Permanent Disability (TPD)
Total and permanent disability (TPD) insurance provides a lump-sum payment to the policy owner in the event that the insured has suffered from an injury or sickness that is deemed to be total and permanent.

The definition of total and permanent disability varies but usually involves the claimant satisfying one of the following:

  • being unable to work;
  • suffering a specific loss (e.g. lose one limb and/or the sight of one eye);
  • requiring future care;
  • being unable to perform domestic work or perform at least two of the activities of daily living; and
  • suffering significant cognitive impairment.

TPD is available under ‘own’ occupation for specified occupations and under the cheaper ‘any’ occupation for a broader range of occupations. The conditions that must be satisfied under the ‘any’ occupation definition are less stringent—for instance, the claimant would have to be unlikely to ever be able to follow any occupation for which they could be reasonably suited by education, training or experience.

TPD usually has a waiting period of six months although in recent times an increasing number of insurers have shortened this to three months.


Critical Illness/Trauma
Trauma insurance has been developed to reduce the financial strain during the recovery period and the cost of care associated with people surviving major traumas such as heart attack, cancer and coronary artery surgery. This insurance pays a lump sum to the insured person upon diagnosis of one of a number of specified conditions.

Most insurers offer cover for more than 40 specified conditions, although the majority of claims are due to cancers, strokes and heart-related illnesses. A lump-sum payment under a trauma insurance policy can, like TPD insurance, be used for any purpose. Some of the more common uses include:

  • paying for a carer;
  • repaying debts;
  • paying costs of additional staff to keep a claimant’s business running;
  • funding renovations to a home that may be necessary due to permanent disability (such as replacing stairs with ramps);
  • as a supplement to any income protection policy or other insurance payments; and
  • meeting medical and rehabilitation costs not covered by a private health fund.

Unlike TPD or income protection insurance, in the case of trauma insurance there is usually no requirement for the claimant to be off work or unable to ever work again.


Income Protection
This form of insurance may be the most financially necessary, as it provides cover for the insured’s greatest asset—their ability to continue to earn an income.

Under income protection insurance, up to 75 per cent of the life insured’s earned income may be insured to protect against sickness or injury. The insurance provides an income stream in the event the insured becomes totally or partially disabled. Benefits are payable after the selected waiting period and are payable for a predetermined period, known as the ‘benefit period’ as long as the insured continues to be totally or partially disabled.

Waiting periods vary between 14 and 720 days and benefit periods range between two years to age 65. Premiums are lower when either/or both a longer waiting period and a shorter benefit period is/are selected. These premiums are generally tax deductible, since the income while on claim will be included in assessable income. Selecting waiting and benefit periods depends on a client’s personal circumstances. For example, some clients may have accumulated large amounts of sick, annual, and long service leave and would prefer to have a longer waiting period. A benefit period of until age 65 is usually recommended, although in some circumstances, especially where a client is insuring for a specific purpose or duration, a shorter benefit period could be selected.

Income protection is also available via superannuation and, given its comparatively high cost, some clients prefer the premiums to be funded via their superannuation contributions.

Income protection is usually available under two variants—agreed value and indemnity value. Under an agreed value contract, the monthly benefit specified can be paid out under a claim for permanent disablement, regardless of the actual income of the claimant at the time of a claim. Insurance companies would insist on the client providing them with proof of income at the outset—that is, this must be submitted along with the application for cover. With an indemnity-style contract, proof of income is always required at the time of a claim, and the amount paid at claim would be the lesser of the claimant’s income for the preceding 12 months or the claimant’s monthly benefit.

Insurance. Can you get by without it?

No.1 insurance rule: it has to be right for you

How long can you go without your income?