What is the difference between health insurance and life insurance and is it a good idea to have both?
What is health insurance? What is life insurance?
What is Health Insurance?
Getting injured or sick is not only inconvenient, it can also be really expensive.
We have two types of health insurance to help pay for these costs.
Luckily in Australia we have a system known as Medicare, which is essentially a taxpayer funded health insurance scheme administered by the Federal Government.
Medicare is funded by a 2% Medicare levy on all taxpayers, with the balance paid from other Government revenues.
Medicare typically pays for patient health costs based on the Medicare Benefits Schedule (MBS) (which is subject to change and revision).
Some things Medicare covers:
- If you visit a doctor outside a hospital, Medicare will reimburse 100% of the MBS fee for a general practitioner and 85% of the MBS fee for a specialist. If your doctor bills Medicare directly (bulk billing), you will not have to pay anything.
- Costs of treatment as a public patient in a public hospital.
Patients may be entitled to other benefits and concessions depending on their total health expenditure for the year.
Australia is currently spending around 10% of its annual GDP on health care costs, around $155 billion in 2013-14
2. Private Health Insurance
Australia also has a private health insurance scheme.
The private scheme is aimed at providing an option for people to take responsibility for their own medical costs and is run by mostly for profit private health insurance companies.
In fact the Government went as far as to introduce a penalty tax, known as the Medicare levy surcharge, on taxpayers who earned above a certain threshold ($90,000 for singles and $180,000 for families) and didn’t have private health insurance cover.
Private health insurance cover is generally divided into hospital cover and extras cover.
- Hospital cover insures you against some or all of the additional costs of being a private patient in either a public or private hospital. Medicare will cover 75% of the Medicare Benefits Schedule (MBS) fee for associated medical costs. Provided you have the appropriate private health insurance policy, your health fund will cover the remaining 25% of the MBS fee.
- Extras cover can include services such as dental treatment, chiropractic treatment, home nursing, podiatry, physiotherapy, occupational, speech and eye therapy, glasses and contact lenses, prostheses (e.g. hearing aids) and ambulance cover. Most extras are only covered to a limited degree and subject to waiting periods, limits per year and lifetime limits. Depending on your cover, some services may not be covered at all.
As with any insurance policy there are terms and conditions and you tend to get what you pay for. Typically the higher the private health insurance premium cost, the greater the cover.
What is Life Insurance?
Life insurance is another form of insurance designed to assist financially when you suffer from sickness or injury.
There are four main types of life insurance which are designed to financially assist you and your family in the event you suffer and sickness or injury:
- Death insurance (to provide for your family in the event of unexpected death)
- TPD insurance (to provide a lump sum payment in the event you become totally and permanently disabled and cannot return to work in any capacity)
- Trauma insurance (to provide a lump sum in the event you suffer a certain sickness or injury)
- Income protection insurance (to provide an ongoing income in the event you cannot work for a period due to illness or injury)
Life insurance is often used to assist in the payment of medical expenses.
Do I Need Life Insurance?
The simple answer is, it depends on your financial situation.
If you are a multi-millionaire and could retire tomorrow but continue to work for the fun of it, then chances are you don’t need trauma insurance.
If on the other hand a traumatic event could be have a big impact on you and your family’s financial position, then chances are trauma insurance is a good idea.
Consider this real life example:
How Much Life Insurance Do I Need?
Your financial commitments tend to follow your life circumstances.
CHART: The Life Insurance – Life Cycle
Calculating Your Life Insurance Cover Amount
There is no hard and fast rule when calculating your life insurance needs.
In November 2013, independent research house Rice Warner crunched the numbers on average amounts of insurance cover for Australian families and came up with the following recommendation:
Here are some factors to consider.
If you need to work to generate an income, then you need income protection.
Remember you can only cover up to 75% of your current salary with income protection, but this is much better than having nothing at all.
There are also a range of variables in income protection cover from waiting period, to length of payment.
Based on claim statistic the majority of trauma claims are due to cancer diagnosis.
CHART: Trauma Claims by Type in 2014
* 2014 TAL claims statistics
We know from statistics that the average lifetime cost of cancer to an individual is $100,000.
So $100,000 is a good amount of trauma insurance to start with.
If you have high debts, a stressful lifestyle, and many financial commitments it is a good idea to increase this cover even further.
Calculating an amount TPD is a little harder.
TPD is designed to provide a lump sum if you can no longer work, hence you should picture exactly what this would mean to your financial life.
CHART: TPD Claims by Type in 2014
* 2014 TAL claims statistics
As you can see the vast majority of claims were cancer related
The amount of TPD should be considered with regard to your income protection cover and trauma cover.
Considering the definitions of TPD, it is highly likely that income protection and trauma would be triggered.
Calculating an amount of life cover is even harder still.
Life cover will pay a lump sum to your dependents in the event of your untimely death.
What financial position would your family be in if you were no longer providing a regular income?
Funding Your Insurance Cover
There are a range of methods you can use to ensure you have enough insurance and can meet the annual premium costs.
You can consider holding life and TPD insurances via your super fund.
Own occupation TPD, trauma and income protection is best held in your personal name.
It is possible to hold income protection in your super fund, which is certainly a viable option if you cannot afford the premium costs from your household budget.
- Healthcare costs in Australia a covered by a combination of Medicare and Private Health Insurance
- Life insurance provides financial protection against unexpected illness, injury or death.
- Life insurance needs tend to follow your life cycle of financial commitments.
- There is no hard and fast rule as to the amount of insurance you should have.
- Consider your current circumstances and financial goals and get insurance cover to match.
Not all insurance policies are the same. Make sure you read the documentation before you sign on the dotted line.
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you with this.