David French | 18/02/2009 4:27:19 PM

This article was originally published as ‘Insuring against tragedies’ in The Morning Bulletin in November 2001.

My brother died on Saturday. It happened out of the blue – he was 47. Through the expressions of sympathy I have become aware that our family is by no means alone in its grief. The forties seem to be a time when we become more prone to serious illnesses.

Pushy sales tactics and shoddy products have earned the life insurance industry a bad name. Notwithstanding this, the concept of insuring against unexpected tragedies is sound. I sometimes meet people who have a young family and heaps of debt, but no insurance. Quietly imagine the grief associated with tragically losing a loved one. Then compound this with worry over providing food and shelter for the family. If you have a mortgage or a young family you are crazy not to purchase appropriate life insurance.

Term life policies require payment of an annual premium. Basically they start relatively cheaply and become more expensive as you get older. You can terminate the policy at will.

Whole of life policies can be thought of as a series of term life policies, with a savings plan attached. They are normally set up with respect to your life expectancy. In the early years the savings component is tiny because commissions and premiums eat up most of the contributions. As time goes on the earnings on the savings component increase to the extent where they completely pay for the insurance premium. This can take a while.

Endowment policies are like whole of life policies but they have a pre-determined time frame. You might have an endowment policy that matures at age 60. You are insured for death up to that time, and at age 60 you will be paid out the savings component.

Trauma insurance covers you in the event that you suffer from a specific condition noted on the policy. If you are diagnosed with a particular ailment or die you will be paid out. They are like a term life policy with bells and whistles. Disability insurance has some similarities.

Income protection insurance pays a portion of your income in the event that you cannot work. The benefit is paid over a contracted time-frame - the longer the more expensive.

There is no right policy for everybody and buying life insurance means doing your homework. If an insurance company identifies your job as risky, income protection insurance can be prohibitively expensive - a term life/trauma policy might be more suitable. Term life policies can be very cheap if purchased through a superannuation fund. Also think more broadly about insurance. Your superannuation is a type of insurance, and so is paying off your house quickly. Removing a burden is just as effective as receiving a windfall.

Do-it-yourself wills and powers of attorney are popular but I firmly believe that it is better to have a solicitor draw them up. Completed incorrectly they can be void and it is very easy to introduce ambiguity where none was intended. Wills containing certain clauses can reduce capital gains tax obligations and some trust structures can lower tax for certain beneficiaries.

My best memories of Nick have a lot to do with Central Queensland. Wishing him home from the army to go on walks to First Turkey, or night fishing in Pumpkin Creek. Camping at Considine and Secret Beaches, catching big mackeral at Conical Rocks. His children are great kids and his wife is an inspiration. Just wish it wasn’t this way.

The Investment Collective (AFSL 471728) is a non-aligned financial planning and investment firm specialising in providing tailored financial and investment advice for individuals and small business. Capricorn Investment Partners Limited's services include financial planning, share trading, portfolio management, insurance broking and self managed super fund administration. Additional information on services provided by The Investment Collective Limited can be found by following this link. Readers are reminded that this document has been prepared for general information purposes only, and any advice contained herein has been prepared without taking into account your financial objectives, situation or needs. Readers are advised to see their financial advisor prior to acting on any general advice.

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