Most people are aware of the importance of insuring their assets, after all it typically takes loads of energy and saving commitment to accumulate your assets.  Unfortunately a large number of the population forget to insure the most important asset of all – themselves.  Personal insurance takes many forms, however the four most common types of policies are:

1. Income Protection
2. Death Cover
3. Total and Permanent Disablement
4. Trauma/Critical Illness

Before reading the definitions of the four types of policies below, it is also important to understand the following stakeholders in an insurance programme:

• Life Insured – the person who is covered by the insurance policy.
• Policy Owner – the person or entity who owns and typically pays the premium.
• Insurer – the company that provides the policy.
• Underwriter – the person who assesses the application for insurance on behalf of the Insurer.

1. Income Protection
In the event of an Income protection claim, the Insurer pays the Policy Owner a regular income stream in the event that they qualify under the temporary disability definition.  Usually the Policy Owner is the same as the Life Insured, except where the policy is owned and paid for by a superannuation fund.  In this case the benefit is paid to the super fund, and providing the definition for Temporary Disablement is the same under the super laws, the payment will be forwarded to the Life Insured.  Complex isn’t it?  Changes to the Superannuation definitions happened recently, so make sure your Income Protection still meets your needs.

Apart from the definition of Temporary Disablement, other factors to consider when reviewing your income protection include – what is the waiting period before you get paid and how long will the payments be made?  These terms can vary and will naturally affect the premium that you pay.  For example, a policy that kicks in 30 days from the claim and pays a benefit to age 65 will be more expensive than a 90 day waiting period with a 2 year benefit period.  Most Superannuation Income Protection policies or ‘Salary Continuance’ policies have a 30 day waiting period and 2 year benefit period.  Be careful, as we have seen a major Superannuation Fund demand employees use up their sick leave and annual leave before paying out from the inbuilt Salary Continuance policy.  Other factors affecting premiums include: your Age, your Health, your Occupation and any extreme activities you may do.

We also pay close attention to whether the policy is an Agreed Value policy or an Indemnity policy.

The Agreed Value policy typically requires some proof of income levels at the time of underwriting the policy, whereas the Indemnity policy will require financial evidence at the time of claim.

The Agreed Value policy is more expensive.  The indemnity policy appears to be the better ‘value’ policy unless of course your income has reduced since the time you took the policy out.

If your financial evidence over the past 2 years indicates a lower income, the Insurer will pay the lower amount, meaning you may have paid for cover that you will never get to use.  Income Protection policies typically cover the Life Insured for up to 75% of their income from personal exertion.  Having said that, I have seen policies cover a higher proportion, however, we recommend careful due diligence on these types of policies.

2. Death Cover
As the name suggests, Death Cover pays out in the event of Death.  As simple as it seems, this type of insurance still needs to be thought through.  Typically the amount of cover is the most important question, and the calculation method can vary depending on your circumstances.  Some clients like to calculate the amount of cover as follows – amount of debt + funeral expenses + lump sum for the beneficiaries.

An important consideration for this policy is that the underwriter will assess the risk that you represent to the Insurer.  In other words if you are 60 years old, over weight and have a heart defect, the Underwriter reserves the right to decline your application, or place a loading on the premium due to higher risk.  This may seem unfair, however it is important to know this at the time of underwriting rather than at the time of the claim.

Please note – most Death Cover policies have an exclusion for suicide within 13 months of the policy start date, and if you are changing policies, never cancel your existing policy until your new policy is inforce (established).

3. Total and Permanent Disablement (TPD)
Similar to Death Cover, TPD is paid out as a lump sum rather than a monthly payment.  TPD is generally combined with a Death Cover policy.  Most superannuation funds will hold a client’s Death and TPD policy, however just like Income Protection, recent rule changes means you should review your policy to ensure it continues to meet your needs.

Most TPD policies provide for the event where a Life Insured is unable to return back to work due to an accident or illness.  In the event of a claim the Insurer will pay the Policy Owner, if the Policy Owner is your Super fund – you will be paid the benefit where the definition from TPD under the super laws is met.

The most common variable I see with this type of policy includes the amount of cover (similar calculation method to Death Cover) and the choice of ‘Own’ occupation vs ‘Any’ occupation.  Naturally Age, Health and Occupation can affect premiums, however my focus is generally always on ‘Own’ vs ‘Any’ Occupation.  An ‘own’ occupation definition means that if you are unable to ever return back to work that you are suitably qualified and trained for, then you may meet the definition.

On the other hand ‘Any’ occupation means if you can’t return back to work for any occupation, you may meet the definition.  Obviously if you are a highly skilled employee/self-employed and you suffer a long term injury, you will be better off with an ‘Own’ occupation definition. You don’t want to be sent back to work licking stamps.

4. Trauma/Critical Illness
With the dramatic improvement in medical science, more patients are being healed and returned to normal day to day living.  It is not uncommon for Heart Attack/Stroke/Cancer and major trauma patients to make a full recovery, or at least a recovery that returns them to work.  Consequently, Trauma or Critical Illness insurance was introduced to assist those clients who no longer met the definition of disablement, however still needed financial support for rehabilitation.

Trauma/Critical Illness insurance pays a lump sum on pre-defined events such as those listed plus many more.  The major variable affecting premiums include: health status, family history and age.  You will note that the occupation risks are removed.

Due to its intent of assisting for rehabilitation, the premium is rarely inside a super fund, and is typically owned and paid for by the Life Insured.

In recent times, the definition of events has been under scrutiny as medical science continues to improve on the assessment and treatment of these conditions. It is important that your policy is regularly reviewed to keep pace with any changes.