If you follow the Barefoot Investor, you've probably considered Hostplus for your insurance.
When you've been looking at this, you might have noticed two key terminologies they use,
both fixed insurance and unitized cover.
But what do these two terminologies mean?
In today's video, I'm gonna share with you a bit of background about each of these definitions
as well as provide you with some context to understand which of these two options might
be the best for you.
But before we get started, last year I shared a video on the government's MyHealth Record.
When researching this, I came across an article in Sydney Money Herald by Ben Grubb which
was amazing.
Ben explained the complexity of the terms and conditions by comparing them to things
that we're familiar with in our everyday life such as the terms and conditions for signing
up for Facebook, joining a bank account or even lodging a tax return.
What he then did was he compared that with our human nature not to read terms and conditions.
He then highlighted statistically how likely we are as humans not to read terms and conditions
and believe it or not, 80% of us are guilty of not reading these documents.
The reason I'm telling you this is to highlight the importance of context.
Ben could've very easily said to you that the My Health record terms and conditions
were 8,000 words long and you would have been ehhh...
But instead by anchoring these things to things that we're familiar with, he provided you
with some context.
Now Gary V., a major online player says that content is king but context is God.
So today, I'm gonna do the same thing for you when it comes to considering the fixed
and unitized cover with Hostplus.
To make it easier for you, I've broken it down into three key sections.
First, we're gonna have a look at the fixed cover and what this means.
Secondly, we'll look at the unitized cover and do exactly the same thing there.
And finally, I'll bring it all together and provide you some context around how to make
the perfect decision for your situation.
But before we get started, I'm gonna assume again that you know how much insurance you
need, whether you've used Scott's multiple of salary method, you've jumped on the Hostplus
website and used their tool.
But if you are stuck, there's also a link in the notes below that you can do your very
own personalized report using my method, but what ever method you've used, make sure that
you don't go any further in this video until you've done this step.
When you apply for insurance and nominate the fixed cover option, the amount of insurance
that you initially apply for will always remain the same unless you specifically make a request
to change it.
For example, if you apply for one million dollars worth of life and TPD cover initially,
when you get your policy renewal each year, the level of cover that you have will maintain
at that one million dollars whether that be next year, five years, or ten years in the
future.
If you do choose this option, the thing that you need to be careful of is the cost.
You see, as we get older, its statistically more likely that we're going to need to claim
on these insurance policies.
Whilst your cover level s remain fixed, you'll notice that each year your premiums get more
expensive.
To have a look at this in more detail, I've put together an example for you to walk through
the impact that age has on cost.
In this example for a million dollars worth of life and TPD cover, I've looked at the
cost of it for a 30 year old, 40 year old, 50 year old and 60 year old.
You'll notice that at 30, the cost of premiums is about a thousand dollars.
At 40, the premium jumps to about $2000.
At 50, you're looking at about $4,000 for that same level of cover.
And finally, should you still require the same level of insurance at age 60, you're
gonna need to spend about 12 and a half thousand dollars a year on your premiums.
What often happens is you forget to come back and revisit your insurances for a period of
time and what's happened in this same time frame is that the premiums have gone up.
As these premiums are debited directly from your superfund, we're less vigilant than if
that same amount of premium was coming from our bank account.
The result is having less money in your superannuation balance in later years.
When you apply for unitized cover, once you've determined how much insurance you need, Hostplus
has a table for working out the value of each unit based on your age.
Secondly, they have a table to tell you how much each unit will cost based on your occupation.
Again, I've included the links below the video for you so you can jump through and have a
look at what your unit value and cost per unit would be based on your exact scenario.
In a unitized cover option, instead of the amount of insurance that you have remaining
the same in the future, the cost of this insurance will remain the same for you.
Again, the insurance company knows that the older we get the more likely it is that you're
going to need to claim on your insurances, so instead of increasing the price, what they
do is they reduce the amount of cover that they'll provide you in the event that you
need to claim.
I've done another example to highlight how this would work.
In this scenario, you'll notice that the premium remains the same at about $900 a year in each
of these different scenarios.
At age 30, that premium will get you about a million dollars worth of cover.
At age 40, you're looking at about that same million dollars worth of cover.
But from 40 to 50, you're gonna see a significant drop off in how much insurance that same premium
will get you.
At age 50, you'll be insured for about $260 thousand dollars, and at age 60, that same
premium will only buy you about $70 thousand dollars worth of insurance.
So now you've seen the difference between the two, which option's the best one for you?
To answer that question, let's go back to the start and see how you determine how much
insurance you need.
I'm not a massive fan of using the simple multiple of salary calculator and the reason
for this, it focuses on an output, rather than looking at the needs behind the cover
levels that have been suggested.
Instead I believe in four key principles when it comes to insuring yourself and your family.
Number one, in the event of something happening to you, you should clear the debt on your
family home.
Number two is to allow for the surviving parent to become super mum or super dad, and what
I mean by that is allow them to focus on the kids rather than having to focus on getting
to work.
Number three is never have more cover than you need.
So this is taking off any net investment assets that you have to reduce that sum insured that
you require.
And finally, number four, I believe you should have enough money to pay for a funeral and
final expenses.
But how does this practically work?
I've given a basic example of two different families to prove my point.
In family number one, we've got a couple in their 30s, they've got two young kids age
5 & 7, they owe about $700 thousand dollars in their mortgage, they've got a family income
of about $150 thousand.
Using Scott's multiple of salary method, they'd need about $1.5 million of insurance.
Using my method, instead of that, they'd need about 1.6, so slightly more but you can see
they're pretty similar.
Family number two, this couple's a little bit older, they're in their 40s, their kids
are a little bit older, they're 15 and 17, their debt has been paid down to about 400
thousand and their family income has increased slightly to about $200 thousand dollars.
Using Scott's multiple of salary method again, they would need about 2 million dollars worth
of life and TPD cover.
Using my method, I believe this family needs about 1.3 million to put them in exactly the
same position should anything happen then the earlier family.
Now that I've highlighted these two examples, would you agree that the younger couple needs
more cover than the older couple?
By looking at these two examples, I hope you can see that the premise that I use is that
the younger couple would need more insurance than the older couple.The reason I highlight
this example for you is to help make a decision as to which of the fixed and unitised cover
options you should choose.
If the need for insurance reduces over time, surely that unitized cover would be the ultimate
selection.
And this is where I believe there's a bit of a difference.
You see, I would much prefer the fixed cover option and the reason for this is control.
Assuming that you take the time to revisit this at periodic increments as opposed to
just letting it go and the premiums running out of control, a fixed cover option will
allow you to adjust the cover you need based on your specific needs at a certain period
of time.
In the unitized cover option, the insurance company's going to dictate how much insurance
you can have at that time.
So I hope this has been helpful in clarifying the difference between the two options and
provide you with some context around which of these options might be best for you.
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