Insurance is getting more expensive and more complex. Just how much do you really need? Christine Long looks at the traps.

Getting the right insurance for your needs is usually a lesson in dealing with complexity. On top of this, there is always the challenge of buying it at a reasonable cost.

As lacklustre equity markets and consolidation in the industry have impacted on insurers, consumers are being asked to pay the price in higher premiums and tighter terms and conditions.

A recent KPMG report on the general insurance industry predicted this trend will continue in the short- to medium-term as "insurance companies claw their way back from the softest market in decades".

Andries Terblanche, an insurance partner at KPMG, explains: "Insurance companies are going back to basics by measuring risk very carefully, and charging premiums that reflect the amount of risk they will carry with an unwillingness to compromise on price."

The need to shore up market share is also leading to deals where consumers are offered premium discounts for taking out multiple products with the same insurer.

Similar trends towards higher premiums and more stringent underwriting are also occurring in the risk insurance market. Worryingly, one of the factors that can add a significant amount to the cost of these insurances - the commission paid to the adviser - is likely to remain opaque to the consumer.

A parliamentary committee recently recommended that commissions on risk products - which can range from 30 to 120 per cent - should not fall under the disclosure regime introduced under the Financial Services Reform Act.

Dean Lombardo, the principal of Access Financial Management, says often people have a wrong perception of what their insurance covers and it is only when they make a claim that they discover the reality of the fine print. So what can you do?

It's important to review your policies regularly, but never give up an existing policy until a new one is signed and sealed. And bear in mind that cheapest is not always best.

Getting a good deal is possible if you take the time to compare definitions, benefits, exclusions and any excesses and co-payments.

Giving all your business to the one insurer can offer worthwhile savings for multiple policies.

With risk products, check whether your adviser or broker is prepared to pass on cheaper premiums by accepting a lower commission. Mark Kachor, the managing director of DEXX&R, says this can represent a saving of up to 20 per cent.

To make it easier for you, Money looks at some of the common traps that can trip you up when buying insurance.

Life insurance
Why? Life insurance pays your beneficiaries a lump sum in the event of your death.

Traps As Ivan Herald found (see "They Didn't Want to Know Me" at right), pre-existing conditions or health issues discovered during a medical can make it difficult to get insurance or result in a significant premium loading. Switching cover, topping up the sum insured or applying for large amounts can prompt an insurer to demand a medical.

Be wary of mailouts offering cheap life cover. Most are accident cover only.

Life cover obtained through a super fund is likely to be cheaper and tax-effective. It's important to check the rules if you are changing jobs. If you have time off between jobs your life cover may lapse.

Most policies will not pay out if the policyholder commits suicide within 12 or 13 months of taking it out, says Lombardo.

If you want to leave death benefits purchased through super to someone other than a spouse or a financial dependent, you need to put in place a binding beneficiary nomination. Otherwise it will be left to the trustee's discretion, says Lombardo.

Income protection
Why? If you are unable to work because of an accident or illness, it will provide you with a monthly income of up to 75 per cent of your salary.

Traps With agreed value-style contracts now less widely available in the market, it is important to check how pre-disability income will be calculated in the event of a claim, particularly if you have a fluctuating income.

Mark Kachor says some companies will calculate it on the basis of the highest 12-month income in the three years before disability. Others will look only at the amount earned in the 12 months before then.

Pre-disability should include bonuses, fringe benefits and super as well as your base salary.

Disclose any previous health issues fully, advises Lombardo. People can run into trouble if they gloss over a back problem that occurred five years ago. "There's every chance the life company will investigate the claim and because full disclosure was not made they may not pay out," he says.

Check on any benefit limits. Some insurers may limit the amount of time they would pay benefits for a stress-related claim, for instance.

The way the insurer defines that you are unable to work is also crucial. It may be based on hours worked, whether you can do the important duties associated with your job or whether you can earn a proportion of your normal income. Sometimes the definitions become more stringent if you have been on claim for a couple of years (also see story on page four).

Trauma
Why? The policy will pay a lump sum in the event that you are diagnosed with any of the listed critical conditions.

Traps Most policies cover the five major medical conditions - stroke, heart attack, coronary bypass, cancer or kidney failure - but check limits on benefits payable and specific illness.

Says Kachor: "The insurer may limit the amount they will pay for procedures such as angioplasty, where it goes quite smoothly and involves a minimum of inconvenience and time in hospital."

Insurers may not pay out if treatment is made by choice rather than necessity, he says. For instance, where a woman with breast cancer elects to have a double mastectomy as a preventive measure.

Waiting periods of between 90 days and 12 months can be imposed on certain conditions such as malignant tumours, coronary artery surgery, stroke and heart attack. Some trauma policies also have a death benefit, so this can be a way to save on premiums if you are contemplating both.

Private health
Why? Waiting lists in the public health system and the opportunity to choose your own doctor have long offered a reason to take out private health insurance. More recently the Federal Government's Lifetime Health Cover and surcharge policies have acted as an additional incentive.

Traps Check what benefits are excluded or limited by the insurer. Matthew Blackmore, a consultant and the former executive director of the Consumer Health Forum, says cheaper funds, typically aimed at the young market, may exclude procedures such as a hip replacement, obstetrics and cardiac surgery.

"The reason consumers get into difficulties is because these are three of the more expensive or frequent procedures," he says.

Everyone should check conditions for excesses or co-payments on their policies. These may be imposed per calendar year, per hospitalisation, per individual in a family or per family. Sometimes they are also imposed on day surgery. Because the variation makes it near impossible to compare funds, Blackmore advises consumers to go with a policy that is easy to understand.

Avoid the gap. Out-of-pocket expenses can arise when the hospital used is not one of the fund's preferred providers or the doctor has not agreed to no gap arrangements. This can be a particular problem with anaesthetists and obstetrics. Always check whether your local hospital is among the fund's network before taking out cover and when referred to a doctor ask whether you will be treated under no gap or known gap arrangements.

Review your policy regularly as benefits and agreed hospitals can change. Although health funds are expected to give members notice of significant changes, there is often debate about what is considered significant and how much notice is required.

Home and contents
Why? Home and contents insurance protects your assets against unexpected events such as theft and damage caused by accident, fires and storms.

Traps Catherine Wolthuizen, the senior finance policy officer at the Australian Consumers Association (ACA), says one of the areas that is often misunderstood is flood damage. Generally storm damage, where rain enters your home through an opening created by a storm, is covered. But if the damage is the result of a flooded river or dam it will not be covered.

Wolthuizen recommends you review your policies regularly, including adding the value of any renovations to your policy and factoring in any new items.

Common exclusions include damage caused by terrorism or if items are damaged or stolen by family members, tenants, guests or domestic help. Damage caused by pets or tree-lopping is also generally not covered and theft of money may receive only limited cover.

Even where a policy is new replacement for old (as opposed to older-style indemnity policies which pay depreciated values), there may be age limits on certain items. For instance, refrigerators and carpet may be depreciated.

You can reduce premiums with higher excess amounts. While premiums are paid on an ongoing basis, the excess is only applied when you make a claim.

Car insurance
Why? Comprehensive car insurance covers repair or replacement of your car for events including theft, collision, malicious damage and weather-related damage. It also covers accidental damage done to other cars or property by your car.

Traps If you buy a market value policy (as opposed to agreed value) and your car is written off or stolen and not recovered, you may not receive the sum insured that appears on the policy certificate. According to the ACA, in some cases you may receive the market value if that is lower than the nominated sum insured.

Find out about benefit limits. Policies usually don't cover mechanical, structural or electrical failures that are not caused by a crash, or damage that is the result of your car being old or poorly maintained.

Often insurers will insist on repairs being carried out by a preferred provider, says Wolthuizen. If your policy allows you to pick your own repairer, they usually won't be guaranteed.

The Insurance Council of Australia says policyholders may not be covered if they fail to disclose traffic offences, fines or criminal history when they buy or renew a policy.

Once again, you can reduce premiums by taking out a policy with a higher excess and by getting loyalty discounts.

'They didn't want me to know'

Until that time the 57-year-old marriage and family counsellor had obtained his

life cover through his superannuation policy. When he turned 55, the policy matured and he had to look elsewhere for life cover.

"The medical picked up that I had type 2 diabetes [and] they didn't want to know me after that," he says.

Herald can control his diabetes through diet, but the insurer told him the premium on his life policy would be loaded by 100 per cent as a result of the diagnosis.

Rather than pay the additional loading the resident of Sydney's Kings Park, who includes presenting seminars in Australia and overseas, hosting a TV program and writing books in his schedule, has relied on the cover provided by accident insurance, income protection and private health insurance in the past year.

However, he is hopeful of getting a better deal from a new specialist life insurance product scheme for Diabetes Australia NSW members, developed in association with PrefSure Life and Association Planners Financial Services.

"There will be a slight loading but nothing like 100 per cent," says Herald.

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