Many investors get dazzled by prospective investment returns but they often forget to cover themselves in case things go wrong.
Knowing your way around the insurance policy maze can save hundreds of dollars a year in premiums and thousands of dollars when you have to claim.
Insurance can be boiled down to three categories: general, liability and personal.
General insurance applies to physical items, such as your home and contents. There are essentially two styles here: "indemnity" or "market value", and "new for old" or "replacement".
The former may save you money in premiums but the real cost becomes evident when you claim. With an indemnity policy, the replacement cost is depreciated based on age, whereas the latter replaces or repairs the item to restore it to "new condition". Similarly, some policies are established as "defined or specified events" policies instead of the more expensive "full coverage" or "comprehensive" policies that generally provide better cover.
Ideally, your policy should be "new for old" and "full coverage".
Make sure you advise your insurer of any improvements that reduce the hazard and, thus, the likelihood of a claim. Discounts are sometimes given if you add deadlocks, monitored alarms or smoke detectors. Even an organised neighbourhood watch program can sometimes help reduce premiums.
Liability insurance is one area where many home owners are often not aware of what's covered and what's excluded.
For example, public and personal liability policies built into home and contents policies usually do not cover people who are injured working around your home, such as a cleaner or gardener.
Under the law, you may have a "worker's compensation" relationship and, on that basis, you may need this type of cover separately.
It may be an inexpensive optional extra of up to $100 a year or you may have to take out cover with a separate insurer.
Personal insurance generally includes life insurance and extends to policies such as disability, trauma and income protection insurance. There is a vast number of choices but a basic understanding should help you get reasonable value for money.
Above all, remember that as you age, your premiums will increase as the risk of paying out increases.
Generally, life insurance cover is cheapest through your employer's superannuation fund. This is because the commissions paid to the adviser are much less (they can be up to 100 per cent of the first year's premium in some non-employer superannuation funds). Similarly, many employer schemes do not differentiate between smokers and non-smokers and will often have an automatic acceptance clause that grants cover up to certain amounts without medical evidence. In some cases, this may be the only way of obtaining affordable cover for individuals.
There are some variations in the definition of "total and permanent disability" and this too can affect the cost of cover.
Generally, it's best to have a policy that covers you if you are unable to return to your "current job" due to disability instead of one where "any job" will do.
Similarly, by incorporating life cover through superannuation, it effectively becomes a tax deduction as the superannuation fund pays the premium, not you. Bear in mind also that there are specific rules that need to be satisfied to access money from a disability claim within superannuation. Generally, if you were to satisfy a disability claim, you would probably meet a condition of release to access your funds.
Trauma cover is relatively new and provides cover when certain medical conditions are diagnosed. This might include strokes, heart attacks or cancer and provides you with a lump sum to aid rehabilitation. Depending on the conditions included, this can become quite expensive as you age. Nonetheless, be aware that if you are diagnosed with a terminal illness, your life insurance may pay in advance a portion of your total benefit to help you sort out your affairs before you die.
Finally, be aware that there are various methods of buying insurance, whether direct from the insurer or through brokers or agents. A broker is supposed to represent you to the insurers, whereas an agent represents the insurer to you.
As a rule, brokers and agents receive commissions of about 15 per cent of the first year's premium for general insurance; 5 per cent for many liability policies. The commission can be as much as 120 per cent for life insurance products.
Of course, it's best to stick with those advisers prepared to disclose their commissions, particularly if you're paying significant life-insurance premiums. If you know who's receiving what, you may be able to negotiate a better deal.
Nick Bruining is a certified financial planner and a board member of the Financial Planning Association.
