Author Topic: Insurance -life, trauma, income protection  (Read 3339 times)

nora

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Insurance -life, trauma, income protection
« on: April 02, 2014, 12:24:14 AM »
I went from a situation of being underinsured, to now I think being overinsured. I have this figure in mind for my net worth required for retirement which is the figure I chose for life insurance. I also have TPD insurance, trauma insurance and am wondering about whether I need income protection insurance as it seems to get mentioned amongst people I know fairly often. I am the main earner in my family which adds on the pressure to be well insured. How do you choose the values for these insurances? Or are they necessary at all?
« Last Edit: April 02, 2014, 12:49:43 AM by Nora »

MayDay

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Re: Insurance -life, trauma, income protection
« Reply #1 on: April 02, 2014, 06:24:19 AM »
We have talked about this a fair bit as DH is the only wage earner.  We settled on insuring him for 1x his annual income, and me for half his annual income.  That was because it was the easiest/cheapest to do through his company, and the policy can be continued after he leaves the company so we will keep the policy long term.

The reason we were ok with the low amount for me is hat the kids are almost to school age, so he doesn't need to fund five plus years of daycare.

The reason we were ok with the low amount for him is that we have a decent chunk of money in retirement, one times his annual income would be enough for the kids and I to live bare bones for four years probably, and we also have family that would help us out if need be.  Plus the kids would get SSI which alone would cover our expenses.  So really, we would be fine for about ten years without touching the LI money or our retirement savings, and by that time I can certainly have gotten a well enough paying job to support myself. 

I lean towards under insuring for catastrophic events, though, because hey are so unlikely to happen, and the insurance companies are the ones who are making out big.  I don't even know what all those other insurances are, but from e trauma and income protection, I assume if you get hurt and can't work, it pays your wage.  Do you have a physical job?  If you have a desk job I don't see a huge value in that.  And many employers offer STD and LTD insurance should something happen.  I guess it comes down to whether your spouse can earn some income if needed, if you are out of work, and what you think the odds are at you will be  out of work.  For us, odds a re low DH will be out of work due to illness/injury, if he is std and ltd pick up some of the slack, and I can go get a job if need be to cover at least most of our expenses. 

nora

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Re: Insurance -life, trauma, income protection
« Reply #2 on: April 02, 2014, 03:42:55 PM »
I don't have a physical job. I think the situation of not being able to work is unlikely to happen, but it would be so much harder to live and save just on my partner's income and so I feel like it is probably worth insuring for something. We have a big mortgage too. If I were disabled then we would possibly need a modified home which is expensive. But the premiums are a wealth-killer in themselves.

TPD is total and permanent disability which pays a lump sum in the event that the insured person becomes disabled.

Trauma insurance pays a lump sum if one of a list of conditions occur, mostly medical conditions rather than injuries funnily enough.

Income protection insurance pays a proportion of your income regularly if you can't work and up to age 65 if you can never return to work.

Life insurance is a lump sum to your estate on your death.

I plan to decrease the life insurance sum each year as our net worth increases, and then to stop all of them once i retire in about ten years.

sparklebunny

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Re: Insurance -life, trauma, income protection
« Reply #3 on: April 03, 2014, 03:30:00 PM »
I have disability insurance that will pay $X per month (tax free) if I'm disabled and can't work.  I chose the amount based on what my budget is each month, including child care (assuming that if I can't work, it's possible I couldn't take care of my child fulltime).

I got my life insurance when I was married (getting divorced now) and since STBXH held the majority of the health benefits and retirement, we chose an amount on him that would replace his salary with a 4% SWR.  That way, I'd still have his salary essentially.  That is a smart way to do it, especially if you don't have much in other investments to draw from.  And we did term life.

For me, we chose an amount that would pay off the mortgages (primary and rental) and pay for daughter's college.  That's waht STBXH wanted.  He didn't care about having enough life insurance to invest to replace my salary.  He just wanted the debt gone.

So there is no one right answer.  It depends on what your goals are.  But since term life is cheap, I'd err on the side of getting more.

Of course, now that I'm divorced, my daughter will have over $1m in her trust account if I die from my life insurance and other assets.  I could reduce the insurance, but if I die I'd like to leave that to her (knowing that her Dad likely won't leave her much or help her with college at all).

Thegoblinchief

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Re: Insurance -life, trauma, income protection
« Reply #4 on: April 03, 2014, 04:00:20 PM »
Hard to offer input without dollar amounts per month, but generally speaking most specialty insurance is a bad deal. Incredibly bad.

Term life is "worth it" until you have half of your FIRE nest egg.

Prairie Stash

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Re: Insurance -life, trauma, income protection
« Reply #5 on: April 03, 2014, 07:28:31 PM »
How much does it delay FI? I like the idea of insurance, I hate the idea of paying for unnecessary stuff.

nora

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Re: Insurance -life, trauma, income protection
« Reply #6 on: April 04, 2014, 08:37:37 PM »
The TPD, trauma and life are $3500 per annum. The income protection would be about $3600 for the year. I guess it would delay FI by 6 months or perhaps a bit longer so I guess in those terms it doesn't sound too bad.

Argyle

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Re: Insurance -life, trauma, income protection
« Reply #7 on: April 04, 2014, 09:31:37 PM »
I'd never even heard of trauma insurance before -- this is an Australian thing?  In the US you can get disability insurance which seems to do the same as the TPD and trauma insurance together, except that you can reduce the premiums by having a waiting period, e.g. six months before you start collecting.  Is that not available?  Trauma insurance sounds like a bad & expensive idea to me.

Also, why choose your FI number for life insurance?  If one of you died, what's wrong with the other one keeping on working for a while, as would happen if you lived?

$3600 a year is steep, really steep.  Your total insurance bill right now is $592 per month!  At a modest 3% growth rate, that much money would equal $$81,439.40 after 10 years.  At 8%, $102,912.54.  Surely spending that much delays your FI date more than six months?

nora

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Re: Insurance -life, trauma, income protection
« Reply #8 on: April 04, 2014, 09:53:30 PM »
Very interesting points raised thanks.

As far as I know the trauma and TPD insurances are just lump sums and can't be delayed in exchange for smaller premiums. The lump sum amounts were just chosen from the air really, suggested by the advisor I had, and I think they are around $800000 each. They would pay off our (really high) mortgage and allow for other needs to be covered.

The income protection can be delayed to decrease premiums though as that is a regular payment and I the premium i mentioned is for a 90 day delay. Initially I didn't get income protection as seemed pointless, but then someone told me that someone he knows has ended up getting a payout to retirement age because of this type of insurance, and so my biassed brain made me think I should change my mind.

 I chose the life amount because I didn't want my partner to be a single working parent which I imagine is much worse than sharing parenting and working, but in reality he wants to work anyway so won't be looking at early retirement anyway and would probably just plug away with the children in daycare etc.

I don't know if trauma insurance is only available in Australia or not. Not really sure why it is called trauma either as it's things like heart attacks, strokes.

We do have high incomes but the premiums are stepped so will increase each year. And seeing the ten year calculation there makes me think that the premiums might delay FI for about a year.