FIRE and Personal Insurance

The vast majority of FIRE posts I see are about areas such as investments strategies, investment structures, savings rates etc.  Insurance and in particular personal insurance rarely seems to get a mention and when it does often gets dismissed as being an unnecessary expense.  I disagree with this, I think it’s a very important part of your road to FIRE.  Read on to see why!

I’m going to put in a disclaimer that none of what I say below is specific financial advice, it is not tailored to anyone’s personal circumstances, you should not be relying on anything written here, and you should seek advice from a licensed professional about personal insurance.  Also, I’ve simplified some of the discussion and left some parts out entirely so that I don’t get too bogged down in details and this post doesn’t end up being even longer than it already is.  With that out of the road, let’s get cracking!

 So what is personal insurance?

Most people seem to think of it as Life insurance which is one type of personal insurance, but there are actually three other types of personal insurance. 

Life insurance is a type of insurance which pays out a lump sum to your dependants, it may also pay out a terminal illness benefit in advance of death. 

Total and Permanent Disability (TPD) pays out a lump sum if you’re totally and permanently disabled.  There are actually two types of this, Any Occupation TPD and Own Occupation TPD.  As the names suggest Any Occupation means you can’t work in any occupation, Own Occupation means you can’t work in your own occupation.  To simplify this, if you can’t work as an engineer any more but you could haul trolleys at the Coles parking lot, you would get a payout on Own Occupation TPD but not on Any Occupation TPD. 

Trauma insurance (which is also known as Critical Illness insurance) pays you a lump sum if you have a specified medical event happen to you.  These are things like cancer, heart attacks, stroke, being in a coma, severe burns etc. 

Last but not least is Income Protection insurance which gives you a monthly payment of up to 75% of your salary, plus potentially your SG contributions, if you can’t work through illness or injury.  Because this is a monthly payment you can normally choose whether you would want this for 2 years, 5 years or until age 65 as well as how long the waiting period would be before it starts paying out to you. If you pass away then your income protection payments stop, although there is sometimes a lump sum payment of 6 months or so.  If you hold income protection in your own name it’s also fully tax deductible to you, the other types aren’t unfortunately although they may be through superannuation.

With all of these types of insurance you can choose the amount of the payout, although with that limit of 75% on your income protection insurance in most cases.  So if you want a million dollars of life insurance or even 5 million dollars that’s doable, although obviously the cost of the insurances go up with the amount that you want to insure.  It isn’t actually a linear relationship but it’s close enough for most people that you might as well treat it that way. 

For some of these types of insurance the cost will also depend on a bunch of other factors like what your occupation is, what your health and that of your immediate family is like, age etc.  The reason for this is that you’re more likely to get injured or be unable to work in some jobs than in others.  I’m a white collar professional who works in an office so if I were to break my leg it’s probably not going to stop me from being able to work.  If I’m a builders labourer, I’m not going to work for however long my leg is in a cast for. 

Likewise if I’m in good health then I’m a reasonable chance of staying that way for a while at least, if I’m young I’m less likely to get sick and be unable to work than an older person, etc.  Basically if you’re young, healthy and work in an office your insurance is likely to be cheaper than that of an older person who has health issues and works in a manual job.

 Underwriting

What is underwriting you ask?  It’s whoever you are buying your insurance from asking you a bunch of questions about all of the stuff above.  What’s your job, what’s your health like, have you got any old injuries, how old are you, do you play dangerous sports etc.  All of these affect the pricing of insurance, whether certain things will be excluded etc.  You have what’s called a duty of disclosure here, which basically means that you have to answer all questions honestly, and you also have to tell the insurance company about anything which a reasonable person would consider relevant to whether they should offer you insurance or not. 

So if you’re a 2 pack a day smoker who also sinks a carton of beer every night and everyone in your family has died before the age of 40 from heart disease plus you work with explosives and on the weekend do skydiving, then even if the insurance underwriter doesn’t ask you about any of this you still have to tell them.  Don’t worry, they will ask you all these questions anyway! 

Before you start getting too nervous about any of this stuff, just because you have issues doesn’t mean you can’t get insurance or there are exclusions or the costs will go up.  Using myself as an example I’ve had a reasonable number of broken bones, dislocations etc but I got covered at standard rates because all of those things have been fixed and are no longer an issue.

Underwriting may sound like a bad thing but it actually gives you certainty in advance that you will be covered for anything that isn’t excluded in your policy.

 How should you buy your insurance?

Well like most things in life, you probably shouldn’t be purchasing it based on some dodgy ad on the TV or internet.  If you do it that way then you don’t get underwritten when you apply for insurance, you get underwritten at claim time which almost certainly means that you are less healthy and more likely to get your claim knocked back as a result.  Buying your insurance this way is often also actually more expensive than doing it properly.

The proper way to buy insurance is to go and see an insurance agent or financial planner.  They can talk you through all of the above plus a bunch of other things in far more detail, and they have professional indemnity insurance so that they don’t have to worry about getting sued because somebody decided that they should make their insurance decision off what someone (ie me) said on the internet. 

More importantly for you, they also have access to much better insurance policies than what is available off the internet or TV, so that the insurance is underwritten on application and is guaranteed renewable which means as long as you keep paying the premiums they have to keep providing the insurance.  Make sure when you do go and talk to a professional that they’re not just locked into any one insurance provider, they should have a bunch like TAL, Asteron, OnePath, Comminsure, etc that they can use.

 But I already have insurance in my super!

Yep, most likely you do have some default insurance in your super fund which you are already paying for.  Do you know how much you have, do you know what it covers you for, do you know what types you do and don’t have, because those are pretty important things to be thinking about.  Typically Life Insurance in your super is actually reasonably standard, you probably won’t have any of the features like terminal illness benefit but more than likely it will pay out on death, with the possible exceptions of suicide, acts of war/terrorism, or pandemics.

TPD, not so much.  Remember we talked about Any Occupation vs Own Occupation above?  Well the stuff in your super has to be Any Occupation because otherwise it wouldn’t necessarily meet what’s called a condition of release and the payout would be locked up in your super fund until age 60 which isn’t going to do you much good if you’re 30 years old and can no longer work in your highly paid office job and are now going to have to push trolleys around the Coles carpark to make ends meet. 

Trauma insurance?  Nope, you definitely don’t have this in your super fund because again it doesn’t necessarily meet a condition of release.  You may have some Income Protection insurance in your super, again with more restrictive conditions than what you would have outside of super.

How much cover do you actually have?

How much of this cover do you have in your super?  That’s a good question, and it’s almost always far less than you need but really depends on your circumstances.  I’m going to put down some rough figures but these could easily be very different from your own situation.  Life insurance and TPD within an industry super fund typically seem to be around the $150k to $250k mark.  Which is a reasonable amount of money, but almost certainly isn’t paying off your mortgage or getting you to FIRE. 

Trauma, well you don’t have any.  Income Protection, I’ve actually seen a bunch which pay out $850 per month.  Yes that is per month, or $10,200 per year, which may put food on the table if you’re lucky but sure as hell isn’t paying off your mortgage or anything else. 

There are plenty of other issues with the default cover in your super like the fact that it’s not underwritten, the insurance company tends to change every few years and they change their definitions at the same time, your super fund can decide that they want to reduce the cover etc.  All up, your default cover in your super isn’t a great plan for all those reasons and more.  I know the Barefoot Investor says that it’s all fine and that’s what you should do, but he is just flat out wrong for the reasons I’ve outlined above plus a bunch of others.

Which is not to say that having your insurance in super (or mostly anyway) is a bad idea, you just want to change what you have in there and how it’s setup.  If you’ve got a fair amount of money going into super thanks to your employers contributions but you’re not planning on relying on it because you’ll have FIRE’d long before then, then paying for some of your insurance out of your super can be a good idea. 

If you’re talking to an insurance agent or financial planner then they can do things like have linked policies which have Any Occupation TPD inside super but Own Occupation outside super.  So the total cost is about the same but most of the premium is paid by the super fund with only a small amount taken out of your own cashflow.  Similarly with income protection, you can have the part of the policy with restrictive definitions inside super and the more generous definitions outside super and the costs split.

These are the fully underwritten policies rather than the generic default policies, so it’s the good stuff.  There are some tax issues with this and you still can’t have your Trauma insurance inside super, but doing it this way is definitely a means of having proper insurance in place without having it affect your cashflow too much. 

 How much insurance do you need?

This really comes down to your own personal circumstances and what you would want/need to have happen if it all went pear shaped.  Basically you need to talk to a professional about this, but these are some things to be thinking about.  For Life insurance, if you’re not married and don’t have kids you probably don’t need much more than whatever would pay off your debts and pay for a funeral.  There is a pretty good chance that your super alone would cover this. 

If you are married and want your partner and any kids to stay in the family home (assuming you still have a mortgage) you probably want enough to pay this off unless your partner is going to be able to do so on just their salary as well as paying for all the other living expenses.  You may also want to add on extra cover to get them to their FIRE number. 

Other things you may want to take into consideration are how much it’s going to cost for the kids schooling, daycare etc.  TPD is pretty much the same story except that you may well need long term care and will want to provide for that as well.  It’s not at all unusual to actually need million dollar plus sums rather than the paltry default amounts in your super fund.

Trauma insurance is a hard one to know how much you want to have, because you don’t know what the costs of any medical event will be.  You might have a pretty small issue which triggers a payout but it doesn’t actually cost you much, but conversely it may be a big expensive issue. 

For Income Protection most people simply insure as much as they can ie 75% of their salary but you may be able to get away with less depending on how close you already are to FIRE and therefore what passive income you already have coming in to cover your living expenses. 

You may end up getting payouts on a number of different types of insurance in which case you’ll have more money than you need, but there is no guarantee of this.  Obviously it’s not great to have been paying for more insurance than you need, but better this than not having enough is my philosophy.

 Why is this relevant to you if you’re into FIRE?

Well unless you’ve already hit your FIRE number and have pulled the pin on work, you still need money to get there.  If the goal is to have a $1.5 million portfolio but you’re currently only at $50,000 and you can never work again, well I guess you’ve hit the RE part of FIRE but you sure haven’t hit the FI part and you’re going to be living off the disability support pension for the rest of your life which isn’t likely to be much fun. 

Maybe you can live off your partners earnings but it’s certainly likely to put a bit of a strain on things financially and potentially emotionally as well.  Maybe your parents can help you out, but what is that doing to their lifestyle and retirement plans?  Do you want to be the reason they’re not able to go on holidays after they’ve worked all their lives? 

So sure, it’s another expense but it’s a worthwhile one in my opinion.  I look at FIRE as being about taking financial responsibility for your own life, and that means having insurance in place so that you can do so even if something does happen to you.

 It won’t happen to me so I don’t need it.

It’s great that you know in advance that you’re never going to have an accident, never going to have medical issues, you won’t end up with mental health issues from stress, or have anything major go wrong in your life. 

Given you know all this you probably also know if your house is going to burn down, if you’re going to be in a car accident and therefore either don’t have insurance for these either or will take preventative measures so that it doesn’t happen.  And hey while you’re at it can you tell me the winning lotto numbers for this week, or even just tell me what the stockmarket is going to do for the next few years so I can buy calls or puts? 

The reality is we don’t know what is going to happen in the future, and we buy insurance to protect ourselves financially in case it does.  The odds of it happening may be low (although 1 in 3 Australians will be out of work for longer than 3 months because of illness or injury so it’s not as low as you may think) but it can have a massive impact and therefore it’s important to protect yourself.

Do you have insurance Aussie HIFIRE?

You bet I do!  Without wanting to give too much away I’ve got enough Life and TPD to get us (or just my wife if I’m not around) to FIRE for her and the kids, Trauma cover to pay for most medical events, and sufficient Income Protection to more than pay for my current living expenses as well as a bunch of home care if it was necessary. 

My wife isn’t in paid employment but she looks after our kids (which in my opinion is far harder work than what I do!) and if something were to happen to her I would probably keep on working so we have enough Life and TPD insurance to pay for home care, daycare and after school care pretty much all the way through to the kids mid teens, with more than likely plenty leftover as well.  She’s got the same amount of Trauma insurance as I do, but doesn’t have any Income Protection because she wasn’t working when we applied for it after having been overseas for a number of years.  So yes, I do practice what I preach!

Re-reading all of the above as I said I’ve simplified a lot of it and left other parts out entirely like how they all interact, stepped vs level premiums, agreed value vs indemnity, buybacks etc.  Personal insurance is a very complex issue and you really do need to talk to a professional about it because they can explain it in a lot more detail.

What do you think about FIRE and personal insurance?  Do you have your personal insurance sorted out?  If you liked this post and would like to read more like it then please subscribe using the link on the right!

PS. One of the things that keeps me writing is knowing that it’s helping people understand and making a difference. This post is one of my favourite ones because I’ve had a number of people tell me that because of my writing on this topic they’ve actually gone and gotten personal insurance in place. If this post inspires you to get your personal insurance sorted out please let me know in the comments or drop me a line at aussihifire@gmail.com as I get a huge thrill out of knowing that it’s helped people protect themselves. Thanks!