6 Things Every Sydney Engineer Must Understand Before Taking Out Life Insurance
Every day, engineers are faced with calculations. You keep us safe, in touch with loved ones, and relatively insulated from harm. Some of you even work in the insurance industry, analysing risk. As much as your calculations make a huge difference in our every day, we don’t feel like finding life insurance for engineers in Sydney should imply wading through more calculations and headache.
If life insurance terms and policies are overwhelming you, Elke Richardson (Senior Life Insurance adviser at Fairbridge) suggests you focus on the following concepts. They’ll help you delve directly into the information you need when comparing policies.
Levels of Cover
As someone with a family, and the responsibilities that come with supporting your loved ones, you won’t always realise the extent of their financial dependency on you until an unforeseen event occurs that brings this reality home. Are you the primary income earner in your family? How quickly could your family adjust to losing your income? What if you are disabled or injured and require care?
Even if you are single, you are reliant on your ability to generate income to support your lifestyle and cover monthly expenses.
Consider the following expenses when choosing how much coverage you need:
- Ongoing Living Expenses – If you are reliant on your income, what would you do to cover ongoing living expenses if you were suddenly unable to work due to sickness or injury?
- Debts – Ensure you have adequate cover to repay debts so as not to leave your family with the burden of having to repay these liabilities without you.
- Income gap – How much money will your family need to stay financially stable if something happens to you?
- Childcare and education for any children or dependents – If you were unable to work again, would your children’s educational expenses be accounted for? How would your spouse cover these expenses? If your spouse is not currently employed, would they need to head back to study before entering the work force? Don’t forget to provide for these expenses.
A lot of us may already have some sort of default life cover in place via our superfund. You may be surprised to learn that, in our experience, almost 80% of people have not nominated a beneficiary on their superannuation account and any insurances it may hold – a beneficiary nomination determines who the account balance and insurance proceeds are paid to in the event of the account holder’s death.
In fact, most people don’t realise they cannot just nominate anyone and there are requirements, under superannuation law, to be an eligible beneficiary.
For life cover not held in your superfund you can also nominate who you want the proceeds to be paid to on death.
Proper thought and planning of the beneficiary nominations is important to ensure that your wishes are met in the event of your death, and the appropriate beneficiaries receive the Life insurance benefit, with minimal tax consequences. The consequences of not attending to beneficiary nominations and estate planning (a Will) can result in either your intended recipients not receiving the proceeds, or even paying unnecessary tax.
Whether you are self-employed, work for an engineering firm, or the government sector, you need to understand how the ownership structure of your insurances impacts claim outcomes.
In Australia, life insurance can be:
- Owned by the person insured – this is the most common form of ownership, as the insured person retains full control of the insurances.
- Owned by a third party – this ownership structure is less common, e.g. a spouse owning the policy on the insured person’s life. This structure can create issues should there be a marriage breakdown and the policy owner, being the spouse, does not want to transfer the policy to the insured person.
- Jointly owned – also a less common structure. E.g. In the case of a married couple, you and partner can own your life cover. On death the proceeds are paid to the joint owner.
- Owned by a trust –this ownership structure is suitable for certain business agreements, or asset protection and estate planning.
- Owned by a company – this is a commonly used ownership structure for keyperson insurance and business insurance cover.
- Owned through a superannuation fund – cover in a superfund is held on behalf of the member for the benefit of the member or their nominated beneficiary.
- Special consideration for default cover in your superannuation fund
Default cover via your superfund might seem like a ‘good and convenient option’. However, on closer scrutiny you may be surprised to find out that the policy doesn’t perform as you expect it to. Because levels of default cover and policy definitions do not take your personal situation and insurance needs into account, more often than not, relying on these levels of cover will result in underinsurance, leaving you and your family exposed. Think twice before going this route.
Beneficial premium structures
Few people are aware that there is more than one premium funding structure available. The most common premium structure is known as a Stepped premium. Stepped premiums increase each year as you age which means the cost increases as you get older. This may be the most suitable premium structure early on as you have competing costs under your monthly budget i.e. mortgage, living expenses, education fees, etc. The reality is, as you get older the Stepped premium’s cost increases may be difficult to maintain, even though you still require the cover.
To counter this issue Level premiums could be considered. Level premiums allow you to lock in a premium rate based on your current age, for longer term insurance needs. Level premiums are higher than Stepped premium at the outset, however, over time the Level premium cost will be less than the Stepped, and can result in tens of thousands of dollars of savings on Life insurance premiums.
Some companies, such as PPS Mutual in Australia (which is available exclusively to select professionals, including engineers), will allow policy holders to retain a level premium rate on reinstated cover even after an insurance claim has been paid.
To better understand your funding options, and how funding your insurances on Stepped or Level premiums may differ, talk to adviser who can demonstrate the effects of both funding options.
Funding methods for paying premiums
Premiums can be funded from various sources, and these are generally driven by the type of cover, policy ownership, and tax considerations.
Premiums can be:
- Employer paid – most common when an employer is funding a group insurance plan i.e. for Group Income Protection plans or Group Life plans the employer would pay the policy premiums as a benefit for company employees, and would also claim any tax deduction applicable to the premiums paid.
- Personally paid – In the case where the life insured also pays for the policy premiums, other than the tax deductibility of Income Protection premiums, all other premiums would be funded out of after tax dollars
- Superannuation paid – superannuation premium payments can take the following forms:
- Direct from your Superannuation – a superannuation fund can pay your insurance premiums where the cover is held within the Superannuation environment. The superannuation fund would receive a tax deduction on the premiums. This is also applicable to Self Managed Super Funds.
- Employer paid as a Super contribution – your employer can pay your insurance premium as a superannuation contribution – tax benefits could flow to you as the life insured, especially if you salary sacrifice the premium costs.
- Paid as a Superannuation contribution by someone who is self-employed – as a sole trader you could receive a tax benefit on the premiums paid.
- Superannuation rollover – this allows you to fund your insurance from virtually any public offer superfund. Other than tax advantage, it allows you to be insured under a product best suited to your needs, and still fund the premiums from your superannuation fund so as not to affect your cash flow.
From the above points you can see there are a number of funding options. To best understand which options are best suited to your circumstances speak to an adviser who will also be able to work with your other professional advisers (i.e. your accountant) to ensure the best outcomes for you.
Value of quality advice
The above points highlight the need for quality advice when managing your personal or business risk insurance needs. The process of getting the right outcome should be based on your specific circumstances. The right insurance adviser would then review the market for the most appropriate policies to meet your goals and objectives, and present you with recommendations in an easy to understand and transparent way.
Fairbridge’s specialist insurance advisers offer great expertise and many years’ experience in Sydney’s Life insurance industry, working with professionals in numerous specialties, including engineering. We can help you find the best coverage to meet your needs and the needs of your family and business.
Contact Fairbridge today to see how Fairbridge Financial Services can serve you and your company.