Self-insure or pass the risk?

OPINION: Imagine you're sick, can't work, run your own business. Won't happen to you? Prepared for that? Self-insured? Hmm.

Sadly, statistics are not in your favour. The majority of people that say they will 'self-insure' have nowhere near the provision set aside for a serious accident or illness, if indeed, they ever get around to making any provision at all.

After years building goodwill and creating your niche market it is frightening how quickly you could lose it all if you do not have the necessary protection in place.

And as for 'it will never happen to me', the statistics are stacked against you, and anyway, how can you be so sure?

Imagine you have taken a mortgage on your house (not a stretch I'm sure), your business is growing nicely and while fixing your PC your screwdriver connects with a live wire and you're fried in more ways than one!

Having income replacement insurance, which can include cover for regular business expenses, may well be your saviour. The income stream paid to you while you watch "PC News today" will allow you to pay the bills, employ a locum and keep the business afloat.

With that much peace of mind who knows what great ideas you will come up with to grow the business?

Australians, as a rule, are chronically under-insured but with increasing levels of debt can we afford to throw caution to the wind? There are several different types of personal insurance available - life, trauma, total and permanent disablement (TPD) and income protection.

Despite differences in the type of 'insurable event' they protect you for, they all have a common goal - to shield you and your dependants and the lifestyle you are accustomed to.

The 9 May federal budget received a lot of attention for the dramatic changes made to superannuation legislation (plenty of it in this column!).

A relatively unreported by-product of these changes will be the interesting impact on the level of insurance you can have within super. From 1 July 2007 the reasonable benefit limit (RBL) will be removed. This will allow you to have an amount in excess of the previous RBL limit (approx $1.3 million) in life insurance without the excessive tax you would have paid in the past.

Additionally, by having your super fund take out your policy, your existing cash flow is not compromised and your beneficiaries are not subject to excessive tax (as they would be pre 1 July 2007 if the payout of the policy was in excess of the RBL limit). Your TPD insurance can also be taken out by your super fund. However, there are several reasons why this is not recommended, particularly if you are self-employed.

Self-employed people who contribute to superannuation and become permanently invalided because of an accident at work will not qualify for concessions that enable an employee to receive some, if not all, of the benefit they receive tax free.

So it won't happen to you? One day you will get around to funding self-insurance? Why would you take the punt? You can hand the risk over to an insurance company for a relatively small premium that can be tax effectively structured with the right advice.

Penelope Joye is an authorised representative of Shadforths. This article provides general information only and should not be construed as personal advice. Individuals should not act on any information without first seeking qualified advice having regard to their financial situation and particular needs.

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