What is life Insurance

Life insurance is a broader term for the suite of life insurance products offered in the personal insurance space. When we say ‘Life Insurance’ it refers to the following types of cover.

Life Cover – A lump sum amount which is paid to the policy holder in the event of their death and/or in the event that you are diagnosed with a terminal illness (policies vary depending on provider).

Total and Permanent Disability (TPD) Cover – Lump sum cover which can be taken as a lump sum or as an income stream (when the policy is owned within Super). There are type types of policy types being ‘Any’ and ‘Own’ occupation. Understanding the difference is critical when taking out this type of cover. In essence ‘Any’ Occupation TPD will only be paid out if you are deemed to be permanently incapacitated with absolutely no possibility to return to work in ‘Any’ role to which you are suited to by education, training or experience. ‘Own’ occupation covers you should you become Permanently Disabled in your current field of occupation i.e. You are a builder and you crush you hand beyond repair and you are no longer able to hold the tools necessary to fulfill your role. You could however after making a claim go into another field and still be eligible for a claim. ‘Any’ Occupation cover is less expensive option but a more difficult policy to claim on.

Trauma Cover – Also known as Critical Illness or Crisis Cover. This type of insurance covers you for various Coronary and Cancer related crisis events in additions to many miscellaneous conditions such as

• Alzheimer’s Disease • Aplastic Anaemia • Bacterial Meningitis • Benign Brain Tumour* • Blindness • Chronic Liver Disease • Chronic Lung Disease • Coma • Dementia • Intensive Care • Kidney Failure • Loss of Hearing • Loss of Independence • Loss of Use of Limbs and/or Sight • Loss of Speech • Major Burns • Major Head Trauma etc.
Not all Trauma cover is the same and the above list is in no way exhaustive or accurate based on your cover. It is vital that you check your relevant PDS to ensure you are aware of what is relevant to your policy.

Income Protection – Income protection will cover you for up to 75% of your payable income and Superannuation payment cover can be added to the policy. As of the 1st of April Agreed value policies will no longer be available and the proposed legislation is that a maximum 5 year benefit will be the maximum benefit available in the future so it is important that you are aware that it may not be in your best interest to review you existing cover. Income Protection cover will not cover you in the event of being made redundant.

If you have debt or dependants, you need life insurance

If you have people who rely on you it is virtually obligatory that you ensure that in the event of your death that your debts are cleared and that if you are the only income generator in the household and that your dependants do not have the capacity to generate income practically, that a lump sum is left to leave an income stream for those dependants. This can take on a myriad of forms and this is where the conversation with your adviser must be in-depth and comprehensive.

As an example, if you have $500,000 of debt owing on your home and you earn $100,000 p.a. from your employment then for your family to be in a similar position following the death of the income generator in the family you would need to have approximately $2,500,000 worth of life insurance. This amount is made up of $500,000 of debt coverage plus $2,000,000 to be invested generating a rate of 5% = $100,000 in income. This does not take into account any superannuation which would be paid out nor does it take into account any reduction in principal but given the average life expectancy for men and women is over 80 the younger you are the more important that sufficient levels of cover are maintained. The Life Cover which is supplied in industry funds superannuation is generally not sufficient. A TPD event is an even more troublesome problem because the income generated from that invested income needs to incorporate the cost of care in addition to living expenses. There are ways of reducing this level of cover and speaking with an experienced Financial Adviser is advised before you address your needs.

Life Insurance – Retail vs Group

Understanding the difference between these two types of cover is paramount to ensuring that you are actually covered. Retail polies are fully underwritten before the policy is issued and as long as you meet your obligation of disclosure you are covered from the date that the policy is issued. It doesn’t matter if after you take out the policy that in 12 months you are diagnosed with diabetes, start smoking and take up a role as a crash test dummy. Once the policy is issued the deal is done! Although retail cover can be expensive, they are a much more reliable type of cover.
Your cover level is fixed depending on whether you have indexation added to your policy prior to taking it out and the premiums generally go up each year. Each year because are people get older there is a higher probability that a policy owner will make a claim and as such more money needs to be collected by the insurer, so funds are available to pay claims.
Group cover is not underwritten at time of policy issue and should you make a claim the insurer will assess your eligibility then. Group TPD and IP cover can be a veritable minefield littered with loopholes which can put you at risk. Understanding Product Disclosure Documents is almost impossible for the insured and Group Insurers have the ability to adjust the T’s and C’s every 5 years as the polies are renewed with the Super Provider and as such the terms you thought were relevant when the policy was issued can change. As an example, QSuper no longer cover anyone who takes out a new IP policy following Covid-19 Crisis.
Most importantly, generally, retail policies premiums increase with age as the risk of a claim to the insurer increases. Conversely as Group polices are not underwritten, the insurer will reduce the level of cover you receive with each birthday. Instead of increasing the cost most of the time the benefit is reduced to reduce their liability. Keep in mind each group policy is different and understanding your cover is key.

The cost of life insurance and knowing what to expect

In my opinion, one of the most important areas to address when taking out life insurance is understanding the cost of cover today vs the cost of cover in the future. If you are young and healthy life insurance is very affordable. When you hit 55 the cost skyrockets. You need to talk with your adviser about the expected premium increase cost which are available to you through quoting software and talking about the expected requirement for maintaining the levels of cover you have taken out.

How to minimise the cost of life insurance

There are ways to reduce the amount of expenditure on insurance by taking out various combinations of Life, TPD, Income Protection and Trauma. There is a considerable amount cross over between the policies and not all policy types are essential for everyone when you have to start addressing where to make concession in cover levels and types due to the cost burden. Discussing the right combination with an experienced adviser can help you reduce your overall cost whilst ensuring you maintain a comprehensive level of cover. Reviewing your insurance periodically is also well advised because as life changes so do your requirements and insurance companies continually need to rework their policies and premiums to gain market share so every few years there may be a better deal out there for you. Keep in mind that changes in your health can hinder your ability to be reinsured on the same terms as your existing policy so this must be addressed when you review your cover on whether it is beneficial to retain your current cover.

Exclusions Loadings and how to address these issues

Each insurer has different polices for underwriting. Whether it be BMI, history of back problems or mental health understanding the polices of the insurer you are applying with is paramount. Only someone who is constantly working with the various providers can understand the subtle nuances of each companies’ policies, which are forever changing. In essence, don’t be afraid to review your cover just because you are worried that your health will be an impediment to be reinsured as a better rate which will allow you to not have to decide between cancelling your cover or reducing it to levels which are not adequate.

You can save thousands by employing this strategy

If you are paying for insurance personally you are paying more for your insurance than if you were to pay for your cover out of super. Firstly, there is a 15% ATO rebate for paying for your cover from super meaning you only pay 85% of the annual premium cost. Having your insurance cover paid from super will reduce your balance but this can easily be addressed. Secondly, paying for insurance personally means you are paying the premium with Marginal Take Rate taxed money. This can be up to 45c in the dollar. If you pay through Super, you are paying with funds which are only taxed at 15%. Making any changes to your cover does however have implications to your policy and your Super so understanding those differences must be addressed.

Life insurance premium structure

Stepped Vs Level – Stepped Premiums Increase with age at the probability that a claim will be made increase. They start of very affordable and then they increase and often quite significantly. Level Premiums are more expensive but they generally only increase with CPI so you know where you stand and they can be a more affordable option over the long term so seeing a comparison of the total accumulative cost of cover is a good idea to discuss as the beginning of the process.

Duty of Disclosure

How many times have you heard stories about Insurance companies who ‘won’t pay’. Insurance policies are contract which, in summary, say,

‘If you give us all the information we require at the time of underwriting, we will cover you for the agreed amount. If you do not give us the necessary information to assess the level of risk we are taking on you won’t be paid’.

Most importantly you are required to provider all relevant information to the insurer to allow them to assess your application. You should not be afraid of this process rather just be aware that you must be thorough and answer all questions asked by the insurer to the best of your knowledge. The more detail you provide, the least likely you are to have an issue at claim time when it is critical that funds are paid out.

Understanding your PDS

Lastly, a Product Disclosure Statement (PDS) tells you what you are and are not covered for under a specific policy and highlights important things such as insured events, claim limits, exclusions, discounts, benefits and information on how the claim process works. It is a legal document that forms part of your insurance contract.

It is important to understand your PDS as it will help you compare and make an informed choice about a policy and will tell you how your insurer will respond if you need to make a claim. It is important to retain a copy of your relevant PDS from when you take out a policy because they are updated regularly.  If you do not fully understand your PDS, you should talk to your adviser who will help you make sense of it.