Life insurance is an important hedge against a loss of income: Mark Bouris

One of the most unpopular topics in personal finance is the insurance known as ‘life products’.

I suppose they’re unpopular because of what they insure against: death, permanent disability and injury. No one wants to dwell on injury or death.

However, look at it this way: life products are financial protection for your greatest asset.

Ask about someone’s greatest asset and they’ll say their house, their share portfolio, their superannuation. But for most people, their greatest asset is actually their ability to generate income. And income is usually closely tied to wellbeing.

So life products hedge against the risk that you’ll lose the wellbeing to generate income.

Life products include:

• life insurance (a lump sum paid to your estate if you die);

• income continuance insurance (up to 75% of your income paid if injury or illness keeps you out of work for an extended period of time);

• total and permanent disability (aka TPD), which pays a lump sum if you can no longer work due to disablement);

• critical illness insurance, (aka ‘trauma’) which pays a lump sum if you’re unable to work. The diseases covered will vary according to the insurer, but all policies cover for what they call ‘seven core diseases’: cancer, stroke, multiple sclerosis, kidney failure, major organ transplant, coronary artery bypass and heart attack.

There are three main categories of people who should at least look at these insurances: breadwinners with kids and a mortgage; tradies; and business owners.

Once you think about these insurances as financial risk rather than medical emergency, it becomes apparent why people take them out. If you can’t work, who will generate the income for your family? If you die – leaving a mortgage and kids –what does your spouse do about the loan and all the other debts and obligations?

A lot of tradies think they can rely on workers comp, and other workers claim to be covered by private health insurance. Many Australians think their employer will look after them and others assume there’s a benefit at Centrelink.

I suggest anyone relying on this sort of barbecue chatter seek out real information about the financial consequences of death, illness and injury. And remember you need to replace the income you’re accustomed to – a large mortgage can’t be paid on a disability pension and workers comp is very tightly defined.

I suggest you investigate your options, using experts when you need them.

Premiums, for the same product, are never the same. Policies contain different inclusions and exclusions. Superannuation fund members can get cheaper life products by buying them from their fund, but what are the inclusions and exclusions? How do they compare?

There are other ways to buy life products: industry associations build good products for their members, insurance brokers are a popular way for business owners to get the cover they need without paying too much, and some Australians get their life products through a financial adviser as part of their planning.

If you’re still confused, ask yourself this: If I insure my car for $20,000, what’s my income worth?

Good luck.

You can contact Mark on Twitter.