Lentils, Lifestyle and Life Insurance
A wave of panic leaves you paralysed. The bright light above you is blinding. The cords, cables and canulas weren’t bothering you a minute ago, now, with senses on overdrive, they feel like hot pokers pressing into burning flesh.
The doctor in the room speaks confidently, there’s an urgency in his voice though that invokes a level of fear saved for only the most dire of situations. ‘Nurse bring in a defibrillator and prep the chest’. Surely they’re not going to shock you while you’re conscious?
Your blood pressure is dropping fast, it’s at levels so low they’ve tipped your bed nearly 90 degrees to get blood flowing to your brain. ‘Cough hard’ you’re told. ‘Don’t close your eyes’.
A machine beeps in the background, it’s starting to feel like a countdown timer, you can’t stop your mind from preparing for that final beep.
What will happen with my children? Will I survive this? How will my partner cope? What could I’ve done differently? Why’s this happening to me? Surely this can’t be happening.
This is my step father’s experience with complications from his second heart attack. There was more than just a moment where his chances were looking far from good. At just 57 he felt as though there was a lot of life left that was very close to being taken away from him.
If this was a regular finance blog, now would be the time to talk about the insurance that would’ve made his life easier, had he arranged it before the heart problems. This is exactly the story most insurance brokers want you thinking about. Just like newspapers, fear sells insurance.
This story however, while it starts at the hospital, is not about just about medication, covering bills and ‘what if’ scenarios.
For a little backstory, Dad was 42 when he had the first heart attack. It was a big one, the scare was big enough that it got him to quit smoking. He still ate too much, lived for work more than he worked to live and ultimately put too much stock into the fact he quit smoking as the ‘silver bullet’ to his health.
Fast forward 15 years and he finds himself in hospital again. The heart attack wasn’t quite as bad however the complications that arose this time nearly ended it all. In a building full of professionals who were only thinking about surgeries, medications and resuscitation devices, he started to research what he could do to combat his heart disease.
What he found was a plant based diet. 3 years on from becoming a vegan, he’s lost a truckload of weight, has more energy than he probably did in his 20’s, has reports from his doctor saying he’s heart disease is well within manageable levels (they refuse to tell him he’s reversed it, which is what he really wants to hear) and only mentions he’s vegan to every third person he meets.
Before you mistake this for a Belle Gibson blog and close the page - I’m not here to tell you how to live, what to eat and what gym to go to. What I do want to highlight though is how your lifestyle is wholly relevant to planning your finances and insurances.
Let’s consider some insurance claim statistics from One Path. If we consider a couple, both 30 years old, it’s 50/50 chance one of them will be able to make a claim on Life, Trauma or TPD by the time they reach 65.
When we look at the statistics of what claims are paid by TAL, overwhelmingly we see cancer as the largest reason for claim (51.19%) then cardiovascular (22.11%).
So the likely hood of any one person is 33% or less. Of that 33% the most likely health issues to be claimed on can often be caused by lifestyle choices.
The biggest problem with insurance is that it's far from free. Let’s say our couple both work full time, are both non smoking office workers insuring for $1,000,000 life & TPD and $100,000 trauma. The projected cumulative premiums for one million life, TPD & trauma insurances with AIA by the time they’re 65 is $535,408 ($242,092 for the wife & $293,316 for the husband).
If we presume they’ll average at a 35% marginal tax rate through that time, they’ll need to earn approximately $717,000 between them to cover the cost. We’re not even talking about income protection yet!
That’s a big piece of your lifestyle today (in the form of premiums paid), the lifestyle you plan for tomorrow (lost investment potential) or the legacy you wish to leave (money left for your estate) when you’re gone if you don’t claim.
Generally, the older you get and the more likely it is you’ll claim, the more it costs to keep the insurance too. A lot of policies lapse simply because they become unaffordable. Often, this is right at the time a claim is most likely.
Remember, insurance companies are businesses trying to make a profit. To look at this as simplistically as possible - it needs to cost everyone collectively more in premiums than the insurer is paying out for it to be a profitable business.
Am I saying not to spend any money on these covers? Definitely not. Of all the statistics spoken about above, a lot of the illness and injuries would’ve been unavoidable. The cruel reality of life for some is there would have been nothing they could have done differently to avoid a terrible health situation. I certainly wish my biological father had done some more planning before he passed away from his car accident.
What I do think, if the main culprits of claiming these lump sum insurances are cancer and cardiovascular issues we should consider that many of these do come down to lifestyle choices. Perhaps really good financial planning takes a more ‘holistic’ approach than just loading up on insurances for what if scenarios. Maybe it's about active steps to avoid a claim if possible in the first place and having some insurance as a last resort.
These 4 steps could help you put a real safety net together
1. Make some proactive health choices now
I speak from experience when I say there’s no amount of money those who love you can receive that’ll be the equivalent of having you around. Their lifestyle is going to change considerably for the worst if you’re gone.
I also doubt it’d be easy to find someone who’s had to make one of these claims in the past who is happier being sick or injured with the money than they were when they were healthy without it. So make the first part of ‘insuring’ your financial plan doing what you can to reduce the risk of an insurable event happening in the first place.
Go to the GP: Have your checkups, set up a health management plan with them if you have to (and don’t forget to include mental health, TAL shows 25% of TPD claims have been for mental and behavioral issues).
Eat healthy(ier): I’m not saying you have to go vegan like Dad did. I can still be caught in a KFC drive through more than I’d like to admit. Wanting as much time as possible with my daughters though has me eating 100 times healthier that I used to. I highly recommend reading over the Blue Zones website for inspiration on how the longest living people in the world eat.
Find some time for moderate exercise. Get a dog to walk, play sport, get out in the yard with the kids. Again, a read through what happens in the ‘blue zones’ and implementing just some of that into your life could make a huge difference to the length, and quality of your life.
Doing what you can to reduce the need to claim in the first place is the best insurance you can have for yourself and your family.
2. When thinking about how much insurance to get, be realistic about what needs covering.
Textbook financial planning says cover all debts, come up with a number to modify your house and car, get the kids through all their years of education (better make it private education, just in case), get assistance for your partner around the house. The list goes on and on. Instead of this, after doing what you can personally to limit your chance of having to claim in the first place, consider:
Would there still be income from your partner? Or assistance from family or friends?
What amount of superannuation do you have that could cover some costs of medical treatment? Often this can be used to assist when you have serious medical issues
In the worst case situations, could money be saved by altering the families lifestyle? Different school choices, downsizing your home, changing the type of car you drive or selling investments?
What’s your family history been? Are you able to take a bigger ‘bet’ that nothing will happen? Or are you betting that something will?
If you’re insured to cover your debt burden then how much above that do you really need? In the case of life insurance for example, do you need to give your partner enough money to grieve without worrying about work? Could this be covered by their own income protection. Could they sell your home and move into something that is still comfortable yet cheaper?
Basically, start to think about how can you sensibly insure yourself for the lowest cost possible. You’re expecting that you won’t claim, yet it's sensible to have a level of preparedness to keep you and your family afloat in case you do.
3. Get the right assistance setting up your insurances.
Let’s think about our couple in their 30’s. Presume the $1,000,000 life and TPD and $100,000 trauma is in fact the right amount for them both:
If, instead of buying their insurance directly from the insurer or a financial adviser who was paid a commission, they saw a fee for service adviser. that $535,408 in total premiums becomes $376,163. That’s $159,245 difference for exactly the same product bought elsewhere! Sure, they’ll probably pay a few thousand dollars for an adviser to help set this up without the commission however it’s going to end up costing a lot less than $150 grand!
The right structure is critical. By utilising superannuation and purchasing the insurance in a tax effective way, that $376,163 they pay through the right adviser costs them approximately $384,501 after tax, compared to $717,000 with poor planning and the full cost with commissions built in.
Insurance commissions are paid on the amount of the premium. The higher the amount of insurance, the higher the commission. If you're getting advice on how much cover is right for you a fee for service adviser does not have the same vested interest to get you to take as much as possible
4. Keep on top of it!
Time and again I see insurances that have increased in cost because the benefit amount is ‘indexed’ and increases every year. This also increases the cost. If you’ve got the right plan in place your insurance needs should be going down with time, not up. Review often and always be looking for ways to reduce the cost safely.
Most important - Look after yourself. If I could go back in time, knowing what I know, to advise my 35 year old stepfather with his ‘financial’ planning, insurance wouldn’t be at the top of the agenda. A healthier lifestyle with a hope to avert the heart issues in the first place would be.