Top 10 things to know before getting Life Insurance

I make insurance recommendations hoping none of my clients will ever make a claim. But the longer I do this profession the more I see how often claims are made and how devastating life can be without insurance cover. Here are the top 10 things you need to know before getting life insurance.

1)    The different kinds of cover

The most common question I get is what do you mean by Life Insurance. It is important to know the different cover types available.

Life Cover - Pays a lump sum if you die or are diagnosed with a terminal illness

Trauma Insurance - Pays a lump sum if you are diagnosed with a serious medical illness listed in the Product Disclosure Statement

Total and Permanent Disability Insurance - Pays a lump sum if you are unable to ever work again due to disability

Income protection Insurance - Provides up to 75% of your income plus Super or Mortgage contributions while on claim if you can no longer work due to sickness or injury

Business expenses insurance – Pays overhead expenses of your business if you are unable to work due to injury or illness

2)    How much cover you need

Determining how much insurance cover you need can be the most crucial component and I believe most over simplified. If you are over insured then you will be paying higher premiums. If you are under insured and the worst happens you may find despite all your best intentions and money spent you have insufficient funds. I put a lot of time and effort into calculating the right amount of cover needed for your personal circumstances and recommend regular reviews. To see  how much insurance cover you may need check out the Life Insurance Calculator or book an appointment to have your complimentary insurance needs analysis completed.

3)    What existing cover you have and how your circumstances changed

When you apply for insurance you are unlikely to be covered for pre-existing illness or injuries. For example if you had existing $100,000 Life insurance and wanted to increase this amount to $500,000 any pre-existing conditions would likely receive either an exclusion, premium loading or in some cases application decline. In these circumstances your financial advisor will recommend to retain existing cover without any exclusions and simply apply for a top up where possible. Contact us today to learn more

4)    The difference between Any and Own Occupation

When applying for Total and Permanente Disablement or T.P.D. Insurance outside of Super you have the option of the ‘Any’ or ‘Own’ Occupation definition. Using ‘Any’ occupation the he insurer pays an agreed benefit when, because of physical or mental ill health, the individual is unlikely to engage in gainful employment for which they are reasonably qualified by education, training or experience. Using the ‘Own’ occupation definition, the insurer pays an agreed benefit when the individual is unable to perform the duties of their own occupation. So what is the difference? It is best explained with an example. James works as a heart surgeon earning $300,000 per annum. If James were to lose an arm he would no longer be able to work as a surgeon but could still work as a GP earning $150,000. Under Any occupation James Is still able to engage in employment for which he is suitable and therefore would not be entitled to a claim despite taking a large pay cut. Under ‘Own’ occupation James is unable to perform the duties of his own occupation, a surgeon, and therefore would be entitled to an insurance claim. ‘Own’ Occupation definition cannot be held inside of Super and therefore your T.P.D. insurance must be held wholly or partially outside of Super. Part of my profession as a financial advisor is to help determine which occupation definition is suitable for my clients and how to structure their policies. Contact us today to learn more

5)    The difference between Indemnity and Agreed Value

There are three main components to Income Protection policies. The benefit amount, waiting period and benefit period. With indemnity cover when you make a claim the insurer will assess your income over the previous 12 months pay the lower of your nominated insurance amount or 75% of your income. For example Chloe is earning $80,000 a year when she applies for $5,000 per month indemnity Income Protection.  Two years later Chloe needs to make a claim but because her health was deteriorating over the previous 12 months only earnt $70,000. In this situation Chloe would receive $4,375, i.e. 75% of your income, per month while on claim. If Chloe applied for agreed value her income would have been assessed at time of application and received the full $5,000 at time of claim. As a financial advisor I provide recommendations on whether I think indemnity or agreed value cover is appropriate for my clients.

6)    What is a waiting period and what is a benefit period

When you apply for Income Protection you can nominate your waiting period and benefit period. The waiting period, commonly 30, 60 and 90 days, refers to how long you must wait until you start accruing replacement income which is paid monthly. For example, John is injured on the 15th of March 2018, has a 30 day wait period and the insurance companies pays claims on the 1st of each month. John would have to wait 30 days until the 15th of April until he starts accruing replacement income and then the 1st of May before he receives his first payment.

The benefit period, commonly 2 years 5 years or until age 65, refers to how long the monthly income payments will last while incapacitated. By evaluating savings, passive income and affordability I am able to make recommendations to my clients about their waiting and benefit periods. Book an appointment today to complete your Insurance Needs Analysis.

7)    Whether to apply for stepped or level premiums

In its simplest form stepped premiums are structured to pay less now and more later whereas level premiums are structed to pay more now and less later. It varies with each recommendation but rule of thumb is you need to hold the same amount of insurance cover for 15 – 20 years before you start saving money with level premiums. The risk with stepped premiums is later in life when you are statistically most likely to make a claim insurance premiums may spike and becoming unaffordable resulting in policy lapses. In my Brisbane Financial Planning firm I often recommends a hybrid of both to suit my clients needs . Learn more using the Money Smart website.

8)    Do you want to index your cover

Indexation for Life, T.P.D. and Trauma insurance increases the benefit amount by 3-5% each year each to combat inflation. Indexation for Income Protection increases the benefit amount between the lower of CPI and 3% each year while on claim.  Both of these figures depend on the insurer so it is best to speak to your local Brisbane financial planner or contact us to learn more..

9)    The difference between group and retail insurance

Many people are not aware there is a difference between group and retail insurance. Having the right insurance is paramount so apply for the best you can afford.

Group Insurance is a pooled insurance product offered by a superfund (often industry funds) or an employer to a group of people. Known for being cheaper than retail, although that gap is reducing advantages include availability without upfront underwriting and availability to a wider range of people. Disadvantages include variability to policy terms and conditions once policies in place, strength of policy wording and flexibility in terms of features and benefits.

Retail Insurance is an individual insurance product offered by an insurer to the life insured . Advantages include locked policy terms not subject to change, more comprehensive policy terms, flexible premium structures such as stepped or level and flexible policy options such as more options available for waiting / benefit periods, Agreed / Indemnity. Disadvantages include traditionally more expensive, upfront underwriting and limitations to who can apply for cover.

10)   How often you need to review

Every time there is a moderate to significant change in circumstances you need to review. This could be due to many factors including changes to family life, income, expenses, debt or assets. Without changes you should review your insurances every 2 – 3 years making sure your provider is still price competitive.

It could cost you nothing to seek Insurance advice providing the best financial protection for you and your family. As a Brisbane Financial Advisor, I can help you get clarity around your future, your options and the next steps in plain English. Book an appointment today to learn more.

What you need to know

Constancy Wealth Management Pty Ltd ABN 51 168 427 361 trading as Constancy Wealth is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327 Australian Financial Services Licence 232706 and Australian Credit Licence 232706.

This information does not take your circumstances into account, so read the relevant disclosure documents and consider what’s right for you. If you acquire an AMP product or service, AMP companies and/or their representatives will receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Ask us for more details.

This list contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.