Why take out personal insurance? Put simply, it can help smooth out some of the unexpected turbulence that we sometimes encounter in life, just as motor vehicle insurance can help take the financial shock out of road accidents.

If you have a financial plan, whether it’s a short- or long-term one, then your financial journey along life’s road is already mapped out. Serious risks still exist though, particularly in the form of illness, injury and even death. While we often think “it will never happen to me or my family” unfortunately things do happen and protection can help make sure life can continue for you and your family with less financial stress.

The good news is that there are four main types of personal insurance that can help to guard you against the financial impact of these threats. They are life, total and permanent disability (TPD), trauma and income protection insurance.

But what’s the difference between them? And how can they help support your financial and lifestyle goals?

Putting aside the obvious emotional consequences for your loved ones – if you died tomorrow, who would be affected financially and how? Could the mortgage still be paid? Would future school fees still be taken care of? What would happen to the lifestyle of those closest to you?

If you have life insurance and pass away (or in some cases, if you’re diagnosed with a terminal illness), a life insurance policy may pay a lump sum to your chosen beneficiary or your estate - depending on your policy nomination. Your financial planner can provide guidance on how to nominate this according to your wishes. The size of this lump sum will depend on the amount you’ve agreed with your insurance provider.

Life insurance isn’t necessarily only for the household’s main breadwinner, but for anybody whose death may affect their family’s ability to cope financially. If the worst happened to you, the lump sum benefit paid to your loved ones would help soften the blow of living without your income. Not only would this give them a better chance of continuing in the lifestyle to which they’re accustomed, but they’d also be able to protect their own financial future.

Potential financial benefits:

• pays debts
• pays funeral costs
• helps cover household living expenses
• any remaining amount can be invested for the future.

An injury or illness that leaves you permanently disabled is also very likely to damage your income-earning capabilities. But debts and medical bills still need to be paid and the future financial health of your loved ones still needs to be taken care of.

TPD insurance pays a lump sum if you become totally and permanently disabled and are therefore unable to work. Various TPD products carry different definitions of ‘totally and permanently disabled’, so be sure to get some guidance from your financial planner before deciding on a policy.

As with life insurance, the TPD payout amount is agreed before the policy is put in place. This allows you to select an amount that will be sufficient to pay medical bills and protect your loved ones financially if you ever need to make a claim.

Potential financial benefits:

• pays debts
• helps cover medical costs
• funds any property refurbishments needed due to disability
• helps cover household living expenses.

The reality is that many of us may suffer from a major medical incident at some point in our lives. When an illness makes it impossible for you to work for a while, your finances can take a major hit if you’re faced with medical bills and other costs while you’re recovering.

Trauma insurance provides a safety net for you and your family to relieve some of the financial stress associated with serious illness. If you make a successful claim against your trauma cover, you’ll receive a one-off tax-free lump sum if you’re diagnosed with one of the medical conditions listed in your policy. These may vary from one insurer to another, but they usually include common and serious conditions like cancer, stroke and heart attack.

You can use this payment however you choose – from paying your out-of-pocket treatment costs to covering your living expenses or taking a holiday to focus on your recovery.

Potential financial benefits:

• pays debts
• covers medical and rehabilitation costs
• helps cover household living expenses
• enables you to reduce your work hours or take time off 

If you get sick or injured and you’re unable to work for an extended period, it could have a serious impact on your day-to-day finances and ongoing financial plan. An income protection policy can make things easier by providing a percentage of your usual income, which is paid on a regular basis while you’re not working.

Income protection policies usually cover 70% of your salary earnings (or, if you’re self-employed, generally up to 70% of the business profits you’ve generated) until you can work again. Always check the Product Disclosure Statement for the details of your policy.

If you have an existing IP policy and you’d like to increase your cover, it’s worth checking how this impacts your claim, with your financial planner.

Many income protection policies can be tailored to suit your needs and budget. For instance, you may be able to reduce your premium costs by opting for a longer waiting period – which is the length of time you have to wait for your payments to start after you make a claim. Some other factors that may affect your premium costs include the maximum benefit period, the frequency of your premium payments and whether your policy has a pre-agreed benefit value or a value that’s assessed based on your income when you make a claim.

Potential financial benefits:

• provides ongoing income to cover living expenses
• helps to cover medical costs
• investment strategy can potentially continue uninterrupted during the recovery period.
• premiums for income protection may also be tax deductible

Talking to a financial planner can help you understand your situation and make confident financial decisions (big or small) so you can get the most out of life.