In this episode of The Purposeful Investor, Aden chats with Michael Hayward, Wealth Adviser and Principal at Capital Partners, to cover all things personal insurance. Their conversation is summarised in Q&A format below.
Q: What types of personal insurance are commonly discussed in financial planning?
A: The main types include:
- Life Insurance
- Total and Permanent Disability (TPD) Insurance
- Trauma Insurance
- Income Protection Insurance
- Business Protection Insurance
Q: Why are these insurances considered important?
A: They act as a financial safety net. While many people think “it won’t happen to me,” unexpected events like illness, disability, or death can have a devastating financial impact. Insurance provides critical support during such crises, helping families recover and move forward.
Q: What does life insurance typically cover?
A: Life insurance provides a lump sum payment in the event of death. It’s a foundational element of a financial plan, ensuring that the family can maintain financial stability if a parent or income earner passes away.
Q: What is Total and Permanent Disability (TPD) insurance?
A: TPD insurance offers a lump sum payment if a person becomes permanently disabled and can no longer work. It helps cover the financial gap caused by the inability to earn an income and supports necessary lifestyle adjustments.
Q: What is trauma insurance and how does it work?
A: Trauma insurance provides a lump sum payment if the insured suffers a specified medical event. These typically include serious conditions like heart attack, cancer, or stroke. The purpose is to offer immediate financial support for medical treatment, recovery, and related expenses.
Q: Can trauma insurance really make a difference during a crisis?
A: Absolutely. Michael shared a powerful story of a client in their late 30s who passed away suddenly, leaving behind a spouse and three young children. Because they had life insurance in place, the payout allowed the surviving spouse to take extended leave from work and be present for the children during a deeply traumatic time.
Q: What is income protection insurance?
A: Income protection insurance covers a portion of your salary if you’re unable to work due to illness or injury. It can provide support for both short-term and long-term absences, often up to age 65, helping families maintain their lifestyle and meet financial obligations like mortgage payments and school fees.
Q: Why is income protection often considered the most relatable insurance?
A: Many people, especially younger professionals, find income protection relatable because it directly addresses the risk of being unable to earn a living due to illness. As one speaker noted, after investing years in education and career development, your ability to earn an income is one of your greatest assets—and it makes sense to protect it.
Q: How does income protection fit into the broader concept of financial planning?
A: It ties into the idea of “human capital” versus “financial capital.” When you’re young, your human capital—your ability to earn—is at its peak. Over time, as you earn and save, your financial capital grows. Insurance helps bridge the gap if your ability to earn is suddenly cut short.
Q: What is business protection insurance and who is it for?
A: Business protection insurance is especially relevant for business owners. It includes coverage for key person risk—protecting the business if a critical team member is unable to work or passes away—and succession planning insurance, which ensures a smooth transition of ownership and financial stability if a partner dies.
Q: How does succession planning insurance work in a business context?
A: Imagine a business owned by three partners. If one partner passes away, succession planning insurance (often called buy/sell insurance) provides a payout that allows the remaining partners to buy out the deceased partner’s share. This ensures the business can continue operating without disruption, and the deceased partner’s family receives fair compensation.
Q: What is the overarching purpose of personal insurance in a financial plan?
A: As Michael puts it, personal insurance is a safety net. It safeguards your financial security and provides your family with essential resources during times of crisis. It’s not just about protection—it’s about enabling continuity and peace of mind.
Q: How has the perception and calculation of insurance needs changed over time?
A: In earlier decades, insurance was often sold based on what people could afford, with little strategic advice. A common rule of thumb was to have life insurance worth 20 times your annual income. However, with the rise of financial planning in the 1990s and 2000s, insurance became more tailored—based on precise calculations of future earnings, liabilities, and family needs.
Q: Why have insurance premiums increased in recent years?
A: Premiums, especially for trauma and income protection insurance, have risen due to an increase in claims. Some of these claims may be borderline or influenced by media pressure, but the overall trend reflects a growing number of payouts, particularly as the population ages and health issues become more prevalent.
Q: Does the need for personal insurance change over time?
A: Yes, it typically decreases as your financial situation improves. When you’re younger, you may have high debt, low assets, and dependents—making insurance essential. Over time, as you pay off debt, grow your investments, and your children become financially independent, your need for insurance often diminishes.
Q: Why can it be difficult to reduce or cancel insurance even when it’s no longer needed?
A: Many people experience a psychological barrier. After paying premiums for years, insurance becomes a safety net. Letting go of that protection—even when financially unnecessary—can feel risky. Some clients are relieved to cancel, while others are hesitant, fearing something might happen the moment they reduce coverage.
Q: How can people ease the transition away from insurance?
A: A gradual reduction strategy can help. For example, reducing coverage incrementally over five years allows clients to adjust mentally and financially. Another helpful step is getting a comprehensive medical check-up before cancelling, which can provide reassurance that the decision is sound.
Q: What’s the emotional side of letting go of insurance?
A: As one speaker shared, not needing to claim on insurance is a blessing—but once you cancel it, you can’t get it back. That final step can feel like a milestone, signaling that you’ve “arrived” at financial independence, but it also requires confidence in your financial plan.
Q: What role does psychology play in insurance decisions later in life?
A: It plays a big one. Many clients feel a strong emotional attachment to their insurance policies because they’ve paid into them for decades. Even when they’re financially secure and no longer need the coverage, the idea of letting go of that safety net can be daunting. It’s not about regret—it’s about the fear of not being able to get it back if something goes wrong.
Q: How can clients feel more confident about reducing or cancelling insurance?
A: Two strategies can help:
- Medical Check-Up: Getting a thorough health check before cancelling can provide peace of mind that you’re making a sound decision.
- Gradual Reduction: Phasing out coverage over several years allows clients to adjust emotionally and financially, aligning insurance with their improving financial position.
Q: What does it feel like to finally cancel insurance after many years?
A: For some, it’s a moment of pride and relief—a sign they’ve “arrived” at financial independence. As one speaker put it, seeing those premium payments disappear felt great and affirmed that they had built a strong financial foundation.
Q: What’s the key takeaway about insurance in the context of long-term planning?
A: Insurance is a dynamic part of your financial plan. It’s essential when you’re building wealth and managing risk, but it should be reviewed regularly and adjusted as your circumstances change. The goal is to ensure you’re protected when you need it—and not overpaying when you don’t.
Q: Why is it important to consider insurance for adult children?
A: Many adult children today may not have any life insurance, especially since default superannuation funds no longer automatically include it. This creates a potential risk for parents who are financially secure and nearing retirement—if something happens to their child, they may feel obligated to step in financially, which could disrupt their own plans.
Q: What changed in the superannuation system regarding insurance?
A: Previously, default super funds included a basic level of life insurance without requiring a health check. However, due to concerns about people unknowingly paying multiple premiums across several super accounts, the government removed this automatic inclusion. Now, many young Australians have no life insurance unless they actively opt in.
Q: What is the “moral hazard” for parents in this context?
A: If adult children don’t have adequate insurance and face a serious health or life event, their parents may feel compelled to provide financial support. This can jeopardise the parents’ retirement plans and create emotional and financial strain. Encouraging adult children to get insured helps protect the entire family’s financial wellbeing.
Q: How does this tie into intergenerational financial planning?
A: It’s about looking at the whole family’s financial health. For younger generations, it’s about building financial literacy and getting foundational protections in place. For parents, it’s about securing retirement. And for grandparents, it’s about ensuring their legacy isn’t unintentionally redirected due to preventable financial gaps in the next generation.
Q: What other risks should families consider beyond personal insurance?
A: Estate planning, cybersecurity, and property insurance are also critical. These areas are often overlooked but can have significant financial consequences if not properly managed. A holistic approach to risk management ensures that all bases are covered.
Q: How should families think about insurance as part of a broader wealth management strategy?
A: Insurance isn’t just a financial product—it’s a foundational part of a family’s risk management plan. It protects against the unexpected and ensures that wealth-building efforts aren’t derailed by illness, disability, or death. As your financial situation evolves, so should your insurance strategy.
Q: What’s the key takeaway for listeners when it comes to insurance?
A: As Michael summarised, insurance is a safety net. It’s there to protect your financial security while you’re accumulating wealth. Eventually, as your assets grow and liabilities shrink, you may no longer need as much coverage—but until then, it’s a vital part of your plan.
Q: What’s the risk of holding onto insurance too long?
A: Some professionals continue paying high premiums long after the need for coverage has passed. This can be especially common in business contexts, where insurance line items are rarely reviewed. Actively managing your insurance ensures you’re not overspending on protection you no longer need.
Q: What’s the final message for families reviewing their insurance?
A: Review your coverage regularly. Make sure it aligns with your current financial position and goals. And don’t forget to consider the broader family—especially adult children—when thinking about risk. Insurance is about peace of mind, and that peace should extend across generations.
