Alternative strategies recommended by CHOICE
The first thing to do is have an emergency fund that you can draw on if something unexpected happens. If you have a mortgage with a redraw facility, use this to store some emergency funds. Otherwise, use a high-interest online savings account. Then consider taking out insurance to cover yourself and/or your dependants. Both life insurance and income protection insurance are usually cheaper to take out with superannuation.
Life insurance is the best choice for covering dependants. As a rule of thumb, the sum insured should be 10 times your salary. However, you may need more depending on your individual circumstances – consider how much you owe, how many children you have and their age, for some example premiums see the table below. You’ll also need cover if you have a loan in joint names or someone else is guarantor for the loan. If you’re single and don’t have any dependants, however, you usually don’t need life insurance cover even if you’re in debt. As AMP’s Ken Lockery says: “What can they do? It’s up to the lender to see if they can recover the debt from your estate.”
Income protection insurance pays up to 75% of your salary if you cannot work because of illness. Premiums vary depending on your risk factors, the waiting period until the benefit kicks in and the duration of cover, which ranges from two years up to age 65, see the table above.
Trauma insurance If you’re not employed because you’re looking after children, you usually can’t take out income protection insurance. Consider trauma insurance instead, which pays a lump sum in case you suffer one of a number of conditions, such as cancer, stroke or heart disease.
Total and permanent disability insurance pays a lump sum if you become permanently disabled because of an accident or an illness such as a stroke. You can be insured against either not being able to do your specific type of work or any work generally. One advantage credit protection has over other insurance options is that premiums for normal life insurance and income protection vary depending on risk factors such as age, type of employment and health.
With credit protection, you generally don’t need a health assessment so it may therefore be more convenient and easy to take out. Be aware, however, that credit protection may not cover pre-existing conditions. Make sure you read the product disclosure statement and be clear about the cover it provides.