If you’ve watched daytime television in recent years you might believe that buying insurance is as simple as picking up the phone. “No medicals, no questions asked and premiums from as little as $2 a day,” the advertisements assure the viewer.
But is it really that easy? Do you need all that cover and will it actually deliver peace of mind if you have to make a claim?
The short answer is you get what you pay for. Cheap insurance may mean fewer hoops to jump through when you’re applying for cover but the trade-off is that the range of “events” you can claim for, and the amount of cover, is less attractive than policies with higher premiums and more rigorous application requirements.
The war for your insurance dollars is heating up. Changes to the way financial advice is regulated in Australia mean commissions will soon be banned on just about all financial products, except insurance. That means the big financial advice suppliers, namely the banks and AMP and all their sub-brands and affiliates, are suddenly getting very excited about the importance of life insurance, income protection and cover for every disease known to humanity.
So while consumers need to be aware of the dangers of buying cheap, limited cover over the phone or online, they also need to detect efforts by financial planners to oversell overpriced and unnecessary cover.
Of course, the new advice laws should ensure financial advisers always act in the best interests of their clients, but their continuing ability to earn commissions from insurance sales means a “buyer beware” caution is still warranted.
The best way to get the cover you need for a fair price is to educate yourself about how insurance works. Use the following six-step guide as your starting point.
Do you need cover?
Australians are underinsured. Our “she’ll be right” mentality convinces us that buying a holiday shack is far more important than ensuring we can pay the mortgage if we can’t work due to sickness or injury. According to the Insurance Council of Australia, 50 per cent of Australians have $100,000 less life cover than they need.
If you own an asset, such as a car, boat or caravan, that you wouldn’t have the money to easily repair or replace, then you need insurance to cover that asset. Likewise, it’s important to have cover for your home building and contents and to insure investment properties.
It’s easy to work out the type and amount of coverage needed for individual assets. It’s a little more daunting to put a value on your health, your ability to earn an income and your life, and to figure out whether you need insurance to protect these intangible, but incredibly valuable, assets.
The basic rule is that if you have debts – particularly a mortgage – and dependants, you need life cover and income protection at least. Ask yourself, “If I die, or if I get sick and can’t work for a while, how would I pay my debts? How would my family cope?”
Got it covered? Read no further.
If your answer is, “I’m not sure”, take the next step.
“Life insurance” and “risk cover” are broad terms for a range of different types of cover.
Term life: This is the most common type of life insurance. In return for the payment of regular premiums, your family will be paid the value of the policy in the event of your death. Cover usually applies immediately and for any cause of death (however, suicide may be excluded in the first 13 months of cover). It’s also becoming more common for term life policies to pay the benefit if the person insured is diagnosed with a terminal illness. The cheapest policies don’t require medical examinations but for higher benefits (about $300,000 plus) you’ll need a more expensive “fully underwritten” policy.
Total and permanent disability (TPD): This is a cheap form of insurance but benefits are payable in a very narrow range of circumstances. Don’t confuse TPD with income protection insurance. TPD policies pay out only if you’re totally and permanently disabled to the extent that you’re unable to do any type of paid work ever again. TPD is sometimes bundled with “accidental death” insurance, which shouldn’t be confused with term life. Again, an accidental death policy pays out only if your death is due to an accident. You won’t receive a benefit if you die of natural or common causes such as a heart attack.
Income protection: Also called salary continuance, this pays a set percentage of your income if you’re unable to work for a time due to illness or injury. Self-harm is usually excluded. Waiting periods apply, both when you buy the policy and after you become injured or ill. Some have benefit limitation periods so benefits cut out after a specified time. Others will pay until retirement. Carefully check the definitions of terms such as “illness”, “injury” and “occupation” as some insurers have more generous wording than others. For instance, some policies will pay benefits if you’re unable to perform the main duties of your normal occupation (this is the preferred type of cover) but others pay out only if you’re unable to perform any of the duties of a range of occupations.
Trauma insurance: This pays a benefit if you’re diagnosed with any of a range of specified diseases, to help cover living expenses and costs related to medical care and therapy. Trauma or critical illness cover (originally called “dread disease” insurance) is usually bundled with term life and/or income protection. It’s increasingly popular to take trauma insurance out for children as the time and expense of caring for a critically ill child can be a major financial concern. Sometimes one parent needs to leave work to become a full-time carer and extra cash may be needed to ensure top-level private medical care.
Do you have cover already?
Many of us have basic life insurance and total and permanent disability (TPD) cover that we may not even know about. Before looking at new policies, check with your superannuation fund – you may find you ticked a box when you joined the fund 20 years ago and have been paying premiums out of your retirement savings ever since.
Insurance sold by super funds traditionally has been cheap, but the level of cover may be relatively low as a result. Death cover within super is usually automatic but you’ll probably have to specifically ask for TPD or income protection insurance.
Some super funds provide limited income protection insurance without requiring the applicant to go through an underwriting process, including health checks. If you have a pre-existing medical condition this is one way to get some income protection cover. However, these limited policies may not offer lifetime cover, restricting the payment of benefits to two years.
Call your super fund and use the list of questions in our table to find out exactly what insurance you already have in place so you can assess whether it’s worth keeping or whether you need more.
Financial snapshot: Assess your assets and liabilities and consider all future financial responsibilities and goals to determine how much of each type of cover you’ll need. Remember that your assets have a market value that will, hopefully, increase over time and that your debts should diminish over time. You may need to do some crystal ball gazing to come up with the right levels of cover but having a firm idea of your current worth is a good starting point.
Personal profile: Your personal circumstances will have an impact on how much cover you can afford and how much cover (if any) an insurer is prepared to offer. Your age, gender, smoking status, occupation and health are just some of the factors taken into consideration by actuaries to determine what type and amount of cover the insurer will provide and at what price.
• Smokers can assume their premiums will be about double those for non-smokers.
• Pre-existing medical conditions can exclude you from certain types of cover or raise the cost.
• Occupations considered risky can exclude you from certain types of cover or raise the cost.
• Life and related insurances usually become more expensive (their premiums rise) as you age.
If you need only low cover (perhaps up to $300,000), then smoking status, health problems or a dangerous occupation may not stand in your way because you can buy cover that comes with “automatic acceptance”. You may be required to fill in a questionnaire but you’ll be granted insurance without a medical or other underwriting requirements.
Be warned, if you fail to tell an insurer about a pre-existing medical condition or lie about things such as smoking status, at best your claim may be knocked back and at worst you may be accused of insurance fraud, which is illegal.
Crunch the numbers
If you need a higher level of life or TPD cover or you’re looking for income protection or trauma cover with more generous features and flexibility, you’ll usually need to go through a more rigorous underwriting process to get an insurer to cover you. So it’s essential to know roughly how much cover you’ll need before speaking to insurers and obtaining quotes.
Now it’s time to bring together all the information you’ve entered into our tables to figure out how much cover you’ll need.
The next step is to start talking to insurers to find the most competitive quote. As boring as it sounds, it’s essential to read through a couple of policies, and ask questions about anything you don’t understand, before coming up with a checklist of the features and conditions you’d prefer. Trauma and income protection policies are the most complex and difficult to understand.
Preference should be given to trauma policies that cover a broad range of events and conditions and keep exclusions to a minimum. Likewise, when comparing income protection policies, look for a generous definition of “occupation” and the longest possible payment periods.
Don’t settle for the first quote. There are significant price differences for similar levels of cover, so shop around.
Claims handling and customer service are also worth considering. Check with the Financial Ombudsman Service to find out about each insurer’s claims handling reputation and take note of how well customer service staff take care of you during the application process.
Manage your cover
Review your life, income protection, trauma and related policies regularly. Make sure your nominated beneficiaries are current. This is particularly important in the event of divorce or if you have more children.
Work your way through steps one to five every couple of years to ensure your needs haven’t changed. If you find your circumstances have altered, it may be time to review your cover.
And keep an eye on the market. Policies change and new styles of insurance are introduced that may have superior features to your dated policies. But make sure you don’t lose benefits by changing policies.
Keep your premiums up to date, particularly if you pay by direct debit and you do something like change banks. A lapse in premium payments could leave you uninsured.