Whenever people talk about insurance the one question that is invariably asked is how much insurance is enough? Obviously, the answer to this question is different for everyone but there are several key concepts to consider.
 
Some things that you would need to ask are:
 

• What is the purpose of the Insurance?
• What are the types of Insurance that I need?

Purpose of Insurance

In the majority of cases Life Insurance has two main purposes. Firstly, It provides the funding for a business succession plan in the event that a business partner becomes seriously ill or dies. Secondly, it will provide for a partner or family in the event of serious illness or death.


Business Succession Planning
 
The use of Life Insurance as part of a business succession plan is becoming more and more the norm. Depending on the type of Insurance cover that is taken, the policy will provide a benefit to the company in the event that a key employer or director is unavailable.
 
It is important to note that for a business succession plan to exist there needs to be a formal written plan in place and a method of funding (an insurance policy, loan etc) to provide funding for the plan.
 
The factors that need to be considered when determining the correct value to insure are:
 
·         The type of Insurance taken: The amount to insure will differ between Life, Trauma and Income Protection
·         The value of the Business
·         Tax implications (capital gains tax)
 
In summary, to set the value of Insurance to be used as part of a business succession, the purpose of the insurance and the value of the business need to be

Provide for Loved Ones
 
The second major use of Life Insurance is to provide financial security in the event of death or unexpected illness.
 
There are a multitude of factors that need to be considered when dealing with personal life insurance. For example, Could you family survive if you died unexpectedly? How would you survive if you couldn’t work?
 
When establishing the correct amount to insure you need to look at any liabilities such as loans or credit card debt that is outstanding, What level of income needs to be provided and any expected extra costs such as funeral expenses or medical costs.
 
When it comes to providing for loved ones the factors that need to be considered are the value of outstanding Liabilities as well as any additional costs and the position you want to leave your loved ones if you could not longer provide for them. 


Types of Cover needed
 
Different types of insurance cover are required in different circumstances.
 
While life Insurance has an obvious benefit, paying out on a death, what is the purpose of Trauma, TPD and Income Protection. Each of these types of insurance fit a specific need.
 
Income protection allows for a continued stream of income if the main breadwinner is unable to work, Trauma cover provides peace of mind through a lump sum payment allowing for time of work for you or a partner in the event of a serious illness and finally life insurance provides for your family long after death.
 
Could your family survive if you were to become seriously ill? or worse die unexpectedly?
 
The factors to consider when choosing the types of insurance you need are what protections do you need and how long could your family survive the loss of income.

Basic Principles

A few basic principals that most insurance advisors employ are noted below:
 
·         Life Insurance should form the basis of an Investment income for loved ones in the event of sudden death. To do this consideration needs to given to the income that would be needed on a yearly basis. An example is noted below:
       o       Required on-going income = $50,000
       o       Minimum expected return on investment = 5%
       o       $1,000,000 at 5% gives the desired return of $50,000 per annum
For further information regarding Investment strategies you should contact a financial planner. Contact us and we can refer you to a financial planner.

·         Income Protection can provide up to 75% of annual income as a monthly payments whilst the insured is off work due to illness or injury. The minimum amount that needs to be insured is the amount required to cover any finance payments and living expenses. This amount will also be affected if there is income coming from an alternate source (working partner or investment property) and if the family includes young children.

·         Life, Trauma and TPD insurance should also take into consideration any debts that are outstanding (home / car loan, credit cards) as well as future debts or costs that maybe applicable (children’s education costs).

·         Trauma Insurance provides a lump sum on the diagnosis of one of over 40 events. The factors that need to be considered are: medical costs, loss of income and loss of partner’s income whilst caring for the ill partner.
 

It is important to note that there are several tax implications that need to be considered with regards to insurance payments. Further, there are medical requirements that may need to be completed prior to insurance being offered for various levels of cover.