What you'll learn in this step: Determine whether life and income protection
insurance is a priority for you.
Life insurance is really only an issue once you have dependants. If you are
the main breadwinner, you need to make sure that your family can continue to
fund their lifestyle if something happens to you.
Even if you don’t have dependants, income protection insurance is essential
if you have obligations such as a mortgage or other debts. If you become disabled
and unable to work, how are you going to fund those payments? With today's medical
advances, many people are surviving serious illnesses and accidents but there
are a number of products on the market such as income protection and trauma
insurance to help put your mind at rest.
Learn more: Risky business, The Sydney Morning Herald, 17
Sept 2003
Insurance is getting more expensive and more complex. Just how much do you really need? Christine Long looks at the traps.
What you'll learn in this step: Discover what types of insurance are
on offer and questions to ask yourself when deciding on a policy to suit your
needs.
Life insurance
With life insurance, the life you're really insuring is everybody else's! Life
insurance that pays out upon death is to all intents and purposes death cover.
You won't be around to enjoy any benefits. But your family will. And that's
why it's important to have some kind of cover. As the major breadwinner, who
would look after the rest of your family when you die? Do you really want to
be beholden to someone else to look after your family? And what if they need
to go on welfare?
Life insurance isn’t just for the main salary earner either. The person who
takes care of the home and children is also providing a valuable service. If
you are a homemaker, how will your other half be able to look after the children,
run the household and keep down a full-time job if you were to die? Life insurance
can be invaluable for both partners in a relationship.
Term Insurance
The main type of life insurance is term life, which provides a cash lump sum
in the event of your death. It is probably the most economical form of life
insurance and you can stop the policy at any time. Term insurance usually requires
you to undergo a medical examination and sometimes an AIDS test and it is renewed
each year with your insurer.
Calculating the amount of cover you need depends on you and your insurer. Some
work on the amount your dependants will need each year. But the policy you select
determines the premiums you pay. Term life insurance is not tax deductible,
although the payout is free of tax. Premiums generally increase each year as
you get older.
Most policies will pay out on death from illness. The only exception is suicide,
with policies containing an exclusion if you die by this method. If your death
is accidental, the payout is immediate.
Most
policies will pay out on death from illness. The only exception is suicide,
and policies contain an exclusion for this. If your death is accidental, the
payout is immediate.
Shop around
Term life insurance is a very competitive market with more than 40 life companies
vying for your business. As with any other insurance, it pays to compare. The
premiums are determined according to a number of factors including your life
expectancy, whether you smoke, your gender and your occupation.
For example, if you are a non-smoking woman you will pay less than your smoking
counterpart and any man regardless of his smoking habits.
Learn more: Want a laugh? Let the life insurance sales folk entertain you, The Sunday Age, 6
April 2003
Life insurance is a risky business and, from next year, it is going to get a lot tougher for the traditional sales agents. The high commissions they are paid will, at last, have to be fully disclosed to consumers.
Make
sure your term life policy is renewable regardless of your health. If it isn't,
you might find yourself left high and dry if your health suddenly deteriorates
when your policy is up for renewal.
Can I get an early payout if I'm terminally ill?
Most policies will pay out a lump sum on diagnosis of a terminal illness when
your life expectancy is less than 12 months. If the payout is made and you then
miraculously recover, the money does not have to be returned.
Is the life cover in my superannuation enough?
Most people have some form of life cover in their superannuation. But this
can have a couple of drawbacks. In the first instance if you leave the company
– maybe because your health has deteriorated – you might find it impossible
to find term insurance elsewhere.
Another issue to consider is the right of the superannuation fund’s trustees
to overrule your decision about who your beneficiary is. There is also tax to
pay on any lump sum where the payout goes to a beneficiary who is not a dependant.
This is not the situation when life cover is with an insurance company.
Warning
The Australian Securities and Investments Commission has issued a warning about
being sold life insurance policies by telemarketers. ASIC says pressure selling
can sometimes result in your being sold an inappropriate policy. Remember to
be wary if buying over the phone.
Whole of life (endowment)
Whole-of-life or endowment policies were once the flavour of the month, but
no more. The policy has an investment component but most independent studies
show you will earn a higher return by taking out a cheaper term policy and investing
the difference in another asset. The premiums you pay are determined by your
age when you take out the policy. Basically you pay the same premium either
until you die or when the policy matures – usually at age 60 or 65. If
you die before you reach this age, the policy pays out an agreed amount. If
you're still alive when the policy matures, you receive a lump sum from the
investment portion.
What you'll learn in this step: Discover how income protection insurance
can help you to take care of your family if you cannot work.
While life cover will look after your family when you die, what happens if
you can't work because of illness or an accident and it's going to take months
to recover? Or maybe you can never work again and you've got school fees to
pay, food to buy and a mortgage hanging over your head.
This is when you need income protection insurance, otherwise known as disability
insurance. It's estimated that you will earn something like $4 million over
your working life, so it would be fair to say that your income needs protecting
a lot more than your home and your car. This is even more so given that at the
age of 35 you are 10 times more likely to be disabled than die.
Learn more: To protect and serve, The Sunday Age, 17
Sept 2003
The strategy To insure my income.
What does income insurance do?
In effect, income insurance protects your ability to earn. Most policies will
pay you up to 75 per cent of your net income either for a limited period or
until you reach the age of 65. But there are many variations on this insurance,
and it is important you understand what is covered by your policy.
Learn more: Risky business, The Age, 29
Apr 2002
Income protection insurance has traditionally been sold as the panacea for
all your financial ills if you are unable to work because of sickness or an
accident. But recent trends in the income protection market have put some
dents in its reputation as a financial cureall.
Agreed value versus indemnity
Some policies pay you an agreed value per month while other policies are an
indemnity product. With agreed value, you are paid a monthly sum settled at
the time you take out insurance. Indemnity cover is about 20 per cent cheaper
than agreed value, but it's also probably about 20 per cent riskier, particularly
if you are self-employed. With indemnity cover, the income paid is determined
at the time the claim is made. This could work in your favour, but it can equally
work against you. If your health has been steadily declining and your customers
– and in turn your income – have been declining too, you will only
be paid on your reduced income.
While
income protection cover is not cheap, it is tax deductible although the payments
are subject to tax, for PAYE employees only. (This does not apply if you are
self-employed or own a business.)
What determines premiums?
Generally premiums are determined by your age, health and gender, whether you
smoke, your occupation, how long you're prepared to wait for your first payment
and how long you want the benefit to last. If you can push out the time from
making your claim to receiving it from 30 to 90 days, you can cut your premiums
by about 25 per cent.
Another determinant is the amount of time the benefit is paid for. A policy
that pays out until you are 65 will cost a lot more in premiums than one that
just pays you for two, three or five years. If you are only insuring for a two
years, there is probably no reason to pay a higher premium for an escalation
clause in your payments to cover inflation. That's because the impact of inflation
will only be minimal during the period.
Unlike life cover, women pay more for income protection insurance than men
because historically women have made more claims. Similarly blue-collar workers
pay more in premiums than white-collar workers.
Learn more: Peace of mind, The Sydney Morning Herald, 7
July 2003
Taking out an income protection policy? Check the fine print, says Christine Long.
If
you want the payout to continue until you are 65, make sure it is indexed. Otherwise
inflation will erode its value.
Is the income protection in my super enough?
Income protection cover available in superannuation policies usually only lasts
for two years. As a result it's quite smart to take out separate income protection
insurance but with a two-year waiting period. That way you get the benefit from
your super for the first two years before your independent income cover kicks
in. And the two-year wait can substantially reduce your premiums.
Check policy definitions
Income protection policies carry a range of definitions when it comes to your
ability to work. Some refer to your ability to perform your own occupation,
while others refer to your ability to perform any occupation. If you're a surgeon
and you become arthritic, it may mean you can no longer operate, but it doesn't
mean you can't conduct other medical tasks.
So if you have a policy stating "any occupation", you may not be able to make
a claim. In contrast, if your policy says "own occupation", your claim is more
likely to be accepted. Some insurers have a combination where they will pay
you if you cannot perform your own occupation for the first two years but thereafter
only if you can't perform any occupation.
Equally, one policy may talk about being able to perform your main duties,
while another may merely say perform your duties. Treat this latter definition
with caution, as it is far too general and could lead to problems if you make
a claim.
Another ambiguity is the ability to work continuously. Say you are on dialysis.
You may be able to work three days a week, but the other two you are on the
machine. Check whether your insurer will pay out in these circumstances.
Income also needs to be defined. In your policy does it encompass your whole
salary package or just the cash component? Also check whether benefits are paid
in arrears. A 60-day waiting period may mean you are not paid for 120 days rather
than 60 days.
If you have other income this may reduce the money you receive as some policies
take into account other income you earn – such as from investments and
workers compensation – and will reduce your payments accordingly.
What you'll learn in this step: Learn about the merits of crisis or
trauma cover and whether you need it.
If you're diagnosed with a critical illness, crisis or trauma insurance can
relieve your financial difficulties. Unlike income protection insurance, which
is dependent on your inability to work, trauma cover is paid out on the diagnosis
of a defined critical illness regardless of your working status.
Instead of receiving a monthly income stream, you are paid a lump sum that
you can spend on whatever you like – medical bills, your mortgage, an overseas
trip, even a new car. The insurance company makes no demands on how you spend
the money. Trauma insurance is often an adjunct to term life policies.
Be careful to read the fine print on what your policy defines as a medical
condition, such as a heart attack, for example. Policies include specific criteria
on major illnesses.
What illnesses are included?
Generally the list includes heart attack, heart disease, stroke, malignant
cancer, chronic kidney failure and organ transplant. In most cases trauma insurance
does not cover you for an accident. The key benefit of trauma insurance is that
it gives you a financial buffer so you have time to recover from an illness.
If you've had heart surgery and need six months to get back to work again, it's
good to know that you can afford to take that time off and not rush back into
the workforce just so you can pay your mortgage. After all if you're trying
to recover from a major illness, the fewer financial worries you have, the easier
it will be.
A good alternative
While trauma insurance is not to be confused with income protection, it is
a good alternative for those people not in the workforce. In particular it suits
homemakers who have no income. Unlike income protection, the premium for women
is lower than for men as statistically they suffer less from such critical illnesses
as heart attacks.
Total and Permanent Disability Insurance
Total and Permanent Disability Insurance (TPD) is normally an extra cover on
a life policy and commonly covers you for some permanent disability that prevents
you from working in your usual occupation. The amount of disability required
for you to make a claim varies. If you are a doctor, you may be considered as
being totally disabled if you have lost the use of one hand. Claims are usually
paid as a lump sum and you cannot be covered for more than the amount of life
insurance you have purchased.
One disadvantage of TPD is that generally, you can only ever
claim it once. It may also make your death cover void so you need to ensure you
have enough cover from a TPD payout to live for an indefinite period in case you
are no longer insurable.
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