Life Insurance Case Studies

Read real scenarios below on life insurance cases.

• Single and working
• Married, no children and two incomes
• Married with children and one income
• Older couple approaching retirement with adult children

CASE: Single and working

Bob is a 25 year old qualified carpenter who is a subcontractor to various builders. He is earning $70,000 gross but pays $20,000 in expenses, most which are fixed expenses ie a leased car and leased equipment. Bob rents an apartment and spends the rest of his earnings of $50,000 on living and entertainment expenses. Bob has little in the way of savings.

What if Bob doesn't have insurance?

Bob has a car accident and is hospitalised for one month. He then faces a long and painful rehabilitation process of 12 months to try to regain the use of one of his arms. Even with private health insurance there are medical bills to be paid particularly for physiotherapy and rehabilitation sessions. Bob has no income for 13 months but must continue to pay his lease costs of $20,000 per annum. What little money Bob receives in disability payments from the government won't cover his rental costs. Bob has to move back home and borrow money from his parents. If he doesn't recover the use of his arm Bob will never be able to work as a carpenter again and will have to retrain into a potentially lower paid job.

What Insurances could Bob have taken out?

1. Income Protection

Bob could have taken out income protection for 75% of his net income of $50,000 which would provide him with a monthly benefit of $3,125.

As he had no sick leave or savings to fall back on ideally Bob should take out the shortest waiting period of 14 days but this is also the most expensive. Other alternatives would be to take out a longer 30 day waiting period but include an accident option which would begin payments from day one if he suffered an accident or to take out a "Plus" product which includes a benefit payable within the waiting period if he is confined to bed.

Due to his youth Bob should ideally take out an age 65 benefit period as if his injury proved to be permanent and he could not work again in his own occupation he would be paid a benefit for the remaining 40 years of his income earning capacity. He should ensure that the policy is "own occupation" for the whole of the benefit period otherwise he could be forced to return to work in any other occupation he is suited to by his training, education or experience, even if lower paid.

Due to his age Bob should consider a level premium rather than a stepped premium as there is only a small difference in price between the two at his age but over the long term he will pay considerably less if he retains his policy long term.

Other desirable features/benefits:

• Claims Escalation/Indexation - so when on claim payments keep pace with inflation
• Specified injury benefit - pays a set benefit for certain fractures or injuries
• Lump sum TPD benefit - pays a lump sum in event of a total and permanent disability
• Future guaranteed insurability - allow increases to cover for certain life events
• Severity benefit - increases benefit by 33% if serious disability is suffered
• Rehabilitation benefit - incentive payments to retrain in another occupation

2. Business Expenses cover

As his income protection will not cover his $20,000 of fixed expenses Bob could have taken out 12 months cover for this so that he did not have to meet these expenses out of the $3125 he received from his income protection

3. Total and Permanent Disability (TPD) / Life insurance

Bob could have taken out an amount of $500,000 of TPD cover so that if he was totally and permanently disabled and unable to work again he would receive a lump sum to supplement his income protection payments. This could be used to pay medical expenses, home modifications and even to purchase a house of his own. Although he had no dependants yet to leave a death benefit to, taking out the same amount of life cover while he is healthy provides protection against an unforeseen event causing his health deteriorating in the future and making him uninsurable.

Other desirable features:

Future guaranteed insurability - by including this option Bob will be able to increase the cover on the occurrence on certain life events eg marriage, taking out a mortgage, having children even if his health has deteriorated.

Own Occupation TPD - a more expensive option than Any Occupation TPD but would still pay a lump sum benefit if Bob could no longer be a carpenter but could return to work in a lower paid job.

What if Bob had these insurances?

If Bob's policy had a 30 day waiting period he would normally not be entitled to receive payments until 30 days after his injury (or later depending on insurer processing dates) and so he would might have to draw down on savings or seek support from his family for this period. However Bob's income protection policy included a Bed Confinement/Nursing Care benefit payable within the waiting period so he received a benefit while he was hospitalised for the first month and then his normal payments commenced. After 30 days Bob also started receiving benefits from his Business Expenses policy to cover his lease payments.

As a consequence Bob was able to stay in his apartment and be self sufficient while he recovered. As Bob's income protection policy was own occupation for the whole of the benefit period Bob continued to receive payments from the insurer while he was unable to perform the duties of his own occupation ie carpenter. Bob's policy also included a rehabilitation benefit which meant that if Bob wanted to retrain in another trade the insurer would pay the costs of this. If Bob's injury was permanent and he was not capable of working again and his policy included the lump sum TPD option he could convert his stream of future income payments to a tax free lump sum. If Bob had taken out separate TPD insurance he would receive a lump sum of $250,000 which he could use to supplement the ongoing payments from his income protection policy.

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CASE: Married, no children and two incomes

Mary and John are aged 30 and are both working in professional occupations earning $80,000 each. They have saved $50,000 which is earmarked for a deposit on the house they wish to buy together and start a family. In the meantime they pay rent and living expenses and try to save as much as possible.

What if Mary and John don't have insurance?

Mary is diagnosed with breast cancer and undergoes surgery and a 6 month period of intensive chemotherapy. Mary is unable to work during this time and incurs considerable medical expenses. Mary is told that she has made a complete recovery but there is still a lingering concern that the cancer will resurface. Mary and John's home ownership dreams are fading as they have spent most of their savings on Mary's medical expenses. They face a dilemma in that Mary has been told that she should try to have a family as soon as possible but it will be hard for them to save for their deposit from one income.

What insurances could Mary and John have taken out?

1. Trauma Insurance

Mary and John could have taken out $100,000 of trauma cover each. They may have based this amount on covering income for a period of six to twelve months in the event of a serious illness and to pay medical bills not covered by their health cover.

Desirable Features:

• Comprehensive cover - providing benefits for a large number of trauma events
• Partial payments - to pay a partial benefit even if breast cancer was in early stages
• Trauma reinstatement - after a claim allows trauma benefits for other conditions
• Life cover buyback - allows life cover to be reinstated 12 months after a claim

2. Life Insurance / TPD Insurance

Mary and John could have taken out life insurance cover so that if one of them died their partner could still realise their dream of home ownership. If they were anticipating taking out a mortgage of $500,000 then if they had insured for this amount the surviving partner would be able to purchase a home outright while they continued to work themselves. This is important because banks are unlikely to lend as much to a single income earner as to a two income family and the burden of servicing a loan from one income is also difficult. TPD (Total and Permanent Disablement) cover could be added for the same reason although in the absence of income protection the sum insured would have to much higher to reflect the income required to replace the income lost from that person over the remainder of their working life eg 35 years.

3. Income Protection

When both incomes are important for the achievement of the family's goals both incomes should be protected. Mary and John could both have taken out income protection with a monthly benefit of $5000 per month (eg 75% of their $80,000 income per annum) with a benefit period to age 65 to protect them against both temporary and permanent sickness and injury.

What if Mary and John had these insurances?

While Mary was unable to work while having surgery and being treated for her breast cancer her income protection policy would have paid, after the waiting period, a monthly benefit of $5000. These ongoing payments would allow the couple's finances to remain in good shape and their saving program to continue.

In addition, when her malignant cancer was diagnosed Mary would have received a payout of $100,000 under her trauma policy. This money could have been used to pay medical bills and top up Mary's income. Importantly this could give Mary the ability to take discretionary time off work after receiving the all clear eg leave without pay to ensure that her recovery was complete which may not have been possible if the couple were under financial stress.

While the life cover was not required in this instance, if Mary and John had deferred taking out life insurance they would have found that after her breast cancer Mary was no longer insurable. Putting life cover in place while both partners are healthy is important as once in place this cover is usually guaranteed renewable by the insurer each year even if your health deteriorates.

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CASE: Married with children and one income

Jane and Terry are aged 40. Terry is a highly paid executive earning $170,000 per year. Jane hasn't worked since having their two children aged 11 and 9 but used to work as a kindergarten teacher. They live close to the city in a house valued at $1.5M with a mortgage of $600,000. Both children attend private schools. On Terry's income they are able to comfortably afford living expenses, school fees and the mortgage and have accumulated $50,000 in savings.

What if Jane and Terry don't have insurance?

Terry maintains a regular fitness routine but has an unexpected heart attack while jogging one morning. Because he is not found by passer-bys until too late Terry dies on the way to hospital. Although still in mourning Jane has to take stock of her finances. She makes plans to return to work but on her salary of $50,000 she will be unable to meet the mortgage payments and private school fees. Jane decides she has to sell the family home, purchase a house in the outer suburbs and enrol the children in the local public school. Just when Jane and the children need the support of their friends and neighbours the most they have to give up the family home, move far away from their support networks and start a substantially different life than before.

What insurances could Jane and Terry have taken out?

1. Life Insurance

Jane and Terry could have taken out life insurance for each of them. For Terry they could have taken out enough to cover the mortgage of $600,000, $200,000 for private school fees and another $1.2M as a lump sum which Jane could draw down on to supplement her own earnings (based roughly on ten times $120,000) ie a total of $2.0M. For Jane they may have taken out enough to cover the mortgage of $600,000 plus an amount of $500,000 lump sum which Terry could draw down on to cover the housekeeping and childcare costs so that he did not have to reduce hours or change jobs (amount based roughly on ten times $50,000) ie a total of $1.1M. Similar amounts of TPD insurance could have been taken out in the event of total and permanent disablement.

2. Trauma Insurance

Jane and Terry could have taken out trauma insurance of say $200,000 to be paid in the event of serious illness. If Terry had survived his heart attack this amount could have helped fund medical expenses, discretionary time off work and even a change in lifestyle.

3. Income Protection

Terry could have taken out income protection for a monthly benefit of $10,625 (ie 75% of his income). Due to the savings they had accumulated Terry could have taken out a 90 day waiting period which would have reduced his premium. Had Terry survived his heart attack but been unable to work again for some time he would have received monthly payments under his policy to help meet the family's expenses.

What if Jane and Terry had these insurances?

Jane could have used some of the death payment of $2M to pay off the $600,000 mortgage on the family home. This would mean that Jane and her children would not have the disruption of moving while they were dealing with their grief. It would also mean that the children could stay at their current private school where they had their support network of friends. A private school education was something that both Jane and Terry had wanted for their children and this could still be achieved. Jane was not forced to return to work full time and was able to be home to provide support for her children. Terry's family were able to continue to maintain the lifestyle they had before his death by drawing down on the remaining lump sum of $1.2M.

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CASE: Older couple approaching retirement with adult children

Travis and Jean are aged 60 and are looking forward to retirement in a couple of years. They own their own home and have $600,000 in superannuation. They have two adult children - Tom aged 27 who is married with two young children earning $60,000 per annum and Janine 25 who has just finished a university course and started her first job in accounting earning $50,000.

What if Travis and Jean don't take out insurance?

Travis and Jean don't believe that they need insurance for themselves anymore as they have no debts, accumulated savings and their children are grown up. However their daughter Janine is diagnosed with Chronic Fatigue Syndrome and is unable to work for a period of 2 years and she comes to live with Travis and Jean. Their son Tom who is the main breadwinner in his family and works as a plumber suffers a serious back injury which means he is unable to work in this occupation again. Jean has to become a full time carer of Tom and his two children while his wife returns to work as teacher. Travis and Jean loan money to Tom and his wife to help them meet their expenses and are considering mortgaging their home so that they can provide them with a deposit to buy a house as their home ownership dreams are fading away. Travis estimates he will need to work well past 65 in order to support his adult children and try to rebuild his retirement savings.

What Insurances could Travis and Jean have taken out?

As it turns out one of the main threats to Travis and Jean's retirement was a serious injury or illness affecting their children which required their support in terms of both time and finances. By taking out insurance for their children they could have protected against this. Because their children are relatively young the cost of this insurance is inexpensive and level premium policies are not much more expensive than stepped policies. By taking out these covers when their children are young and healthy they are putting in place valuable cover which their children can assume responsibility for when their finances allow.

1. Income Protection

Travis and Jean could have provided the funds for Tom and Janine to purchase income protection cover (the policies would be owned by Tom and Janine so that they could claim a tax deduction for the premium). Each of them could cover up to 75% of their income with a benefit period to age 65 which would ensure that they were covered for both short term and potentially long term sickness or injury. Including the claims escalation option in these policies would be particularly important to ensure that when they were on claim the payments they received were indexed to inflation.

2. Life Insurance and TPD

To supplement the income protection payments Travis and Jean could have taken out TPD cover of say $500,000 to provide a lump sum in the event of permanent disablement. This would have been particularly useful in the case of Tom's injury as it would have allowed his family to purchase a home. Similarly a much larger death benefit of say $1,500,000 would have been required to fund the purchase of a home and also to provide a lump sum for Tom's widow to draw upon while bringing up their two children. While Travis and Jean are paying for the policies they will need to ensure that they are be named the beneficiaries of the policy so they can determine how the proceeds of the policy will be spent in the event of the death of their children.

3. Trauma Insurance

Travis and Jean could include an amount of trauma cover of say $200,000 to cover a serious illness or injury which was not permanent but which would involve time off work and medical expenses and significantly affect their children's finances and prospects.

What if Travis and Jean had taken out these insurances?

Both Tom and Janine would have received income protection payments which enabled them to live independently of their parents and without needing to call on them for funding. In Janine's case she would have been supported until she was ready to return to work and she would have received partial payments from the policy if she was only able to manage to work 2 or 3 days a week. Tom would receive the payments from his policy until age 65 and these payments would be indexed to inflation each year. In addition the TPD payout of $500,000 which Tom received would enable his family to purchase a home and remain financially independent. Importantly for the small cost of these insurances Travis and Jean can be confident that their retirement plans will stay on track and their children will be well cared for.

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