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. 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.
2. 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
3. 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.
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.