A guide for all your personal insurance needs.

An often overlooked area of the family finances is that of personal insurance. Although not a topic that fills people with excitement, it’s an incredibly important issue and deserves a genuine discussion within every household.

Why? It’s one of those products that no one wants until they suddenly realise they need it. Unfortunately, by then, it is too late to get it.

There were countless occasions as an adviser, that I had people come to me for an insurance cover because of an ailment they had just been diagnosed with. Unfortunately for them, insurance companies do not act retrospectively and as a result, there was absolutely no way of assisting them. ( Obvious moral to this story)

The cost of personal insurance is probably the biggest deal breaker. This added to its intangible nature, makes people feel they are paying for something they’re not really getting.

Strangely though, 99.9% of the same people have no qualms about ‘forking’ out money for car insurance. The consequences of losing their 2007 Toyota must be far easier to imagine than any mishap to one’s self.

So, if you have a family or are planning one, you really do need to make their welfare a priority. No one can predict the future, but you can make sure the future unfolds as you envisaged it would.

So let’s look at the different personal insurances that are available. Usually, they are classified into 4 major categories, each one covering a different type of event.

Here they are;

Life insurance

This is a predetermined lump sum that flows to your estate or a nominated person(s) when you die. Death can be through either accident or illness but suicide is exempt for the first 12 months.

The main purpose of this type of insurance is to give financial resources to your family should you die. The big issue is deciding on just what is the right amount of coverage. Many people often settle for having all their outstanding debts, such as mortgage and credit cards, paid out.

Although this is a good start, there are still many household expenses that continue, so these should also be factored in when considering cover.

Trauma insurance

This gives you a predetermined lump sum, paid when a medically diagnosed event occurs. These events range from, cancer, heart attacks, brain-related issues and so on. Generally, they will cover all the common types of medical ailments we are prone to these days.

Policies can differ in what they cover so it is important to read the small print. The purpose of the cover is to give a lump sum for medical expenses, time off work and any other costs that can go with a serious health issue.

All trauma policies require you to survive the medical trauma for at least 14 days. Check the policy conditions to find this survival period as some policies may need a longer wait. Remember you are only paid if you match the ailment described in your policy document, so give it a good read.

Total and Permanent Disability (TPD) insurance

This insurance provides a predetermined lump sum paid to you should you become totally and permanently disabled. To qualify for payment under this type of policy, you must be unable to resume work as a result of your medical condition. TPD is a little different from the trauma policy in that your inability to work can be caused by either an accident or a serious illness.

There is a major point that really needs to be understood with this type of cover, and that is defining being unable to work. I have gone into this aspect in some detail under the ‘Some important facts’ section. It is an area that is very important to fully understand. And make sure you dis- cuss this aspect with the person selling the insurance.

Income protection insurance

This policy is designed to replace up to 75% of your current gross income should sickness or accident prevent you from working. The premiums are tax-deductible unlike the other policies, so there is a bit back from the Government.

An important issue for this type of policy is being unable to work. As mentioned in the TPD discussion, I have included some detailed information on this topic in the ‘some important facts’ section.

Income protection policies have 2 facets that will alter the cost of the premium.

Benefit payment period

Income protection has 3 choices for how long you will be paid for. 2 years, 5 years or until age

65. For example, if you chose the 2 year period, your benefit will be paid until 2 years have elapsed, even if you are still unable to work after this time.

My suggestion is to opt for ‘until age 65’ as this guarantees your benefit is paid until you reach the age of 65. So in the worst case scenario of being permanently unable to work, you will at least be paid 75% of your salary right up to 65.

Benefit waiting period

The benefit waiting period is the time that must elapse before you can start receiving your benefit. Generally, this is from 14 days up to 2 years. If you select a waiting period of 30 days, after submit- ting your claim the insurer waits 30 days before sending you any money. Yes, you may recover during this waiting time, and in that case, you won’t get paid because you don’t need it.

When you are choosing a waiting period, consider how many sick days, holidays and long service you have. These will enable you to survive financially before you need the insurers’ money which allows you to increase your benefit waiting period. Why? The premiums for a policy get cheaper the longer your waiting period, so think carefully about this issue.

Additionally, depending on the provider of the policy you can usually add other ‘bells and whistles’, at a cost of course. Make sure you look closely at what may be offered and think about what is important to your situation before making choices.

Some important facts

As tedious and boring as it may be, you must try to read the policy document of any insurance policy you are considering. Now, I know exactly how difficult these documents are to read but do your best. Particularly look for any clauses that may show certain events or conditions are exempt from cover, or anything else that may void a policy.

Remember, small print in a contract is not there to save on ink costs! Read carefully.

At the very least, always get a detailed explanation of any issues from the provider of the policy. Ask questions such as ‘What if this happens….?” or “How does (blah) affect my cover?”    Get an idea of what you can do, and what you can’t do to stay insured.

Oh, and don’t fib about your medical history in any way shape or form. Insurance companies first check with your doctor when you apply, and also recheck when you send in a claim.

Failing to show a health aspect is called non-disclosure in the insurance business. Should the in- surer discover any medical facts that you may have failed to show, you can just about guarantee they will refuse payment quicker than you can say “but I forgot!”

A good idea is to write the answers to your questions in a clear and concise way, on a sheet of paper. If possible get the salesperson to agree with your notes and get them to co-sign the document – make sure it’s dated.

You now have what is termed in the financial planning world a ‘diary note’. Keep this note attached to your policy, and should you have any issues in the future it may help support you if a claim is refused.

By the way, if you smoke make sure you declare it. I know it almost doubles the cost but to be classified as a non-smoker you need to have not smoked for at least 12 months. “How would they find out?” I hear you say. There is actually a blood test specifically designed to check, and yes, it can reveal a genuine 20 a day smoker from passive smoke inhalation.

Policy definitions

Another important issue is to be very careful of some of the definitions that are in policies. Pay particular attention to what the policy states as being unable to work. The insurance industry uses two major definitions, each being a choice of the insured when purchasing the policy. They are;

1.     Unable to work in own occupation

• Unable to work in any occupation

Of these two definitions no. one is by far the better definition. Here’s why. Imagine you have a policy with a definition of ‘unable to work in any occupation” Let’s say you have a car accident and you lose both legs and you are now confined to a wheelchair. Let’s also suggest your current job is a carpenter. Obviously working as a carpenter when confined to a wheelchair is impossible, so you claim for your insurance.

The insurance company looks at your claim and say’s to you “you can’t work as a carpenter, but, you could work as a receptionist, or a clerk or any other type of work suitable for someone in a wheel- chair”. Therefore as you can still work in ‘another occupation‘ the insurance company will deny your claim.

Somewhat confusing, but if you can still work in any other occupation no matter what that work may be; the insurer will always say you are not permanently disabled and therefore unable to claim.

Now, if you had selected the ‘own occupation’ any illness or injury, preventing you from

working specifically in your current occupation, will be successfully paid. So our example of a carpenter, the loss of both legs means they are unable to work’ in own’ occupation – which is carpentry and as a result, the claim is paid. Job done.

When buying any insurance that covers you for being off work, such as income protection and TPD make sure you get the ‘own occupation’ (No 1) definition. But as I have said, always ask questions of the person selling the policy and be very clear on what you are getting.

Types of premiums

Another important area of consideration is how you structure your premiums. Normally you have two options,

Stepped premiums Level premiums.

Stepped premiums increase each year, whilst level premiums stay the same over the life of the policy. As usual though, with all things insurance company, it is not so simple.

The level premiums, being for the life of the policy start more expensive than the stepped. After about 6 years the premiums equalize and from there on the stepped premium becomes increasingly more expensive.

My suggestion is if you are in your twenties or thirties; always go the level premium even though it is initially more expensive. I can assure you if you keep the policy for a while it will be far more economical. Now those in their 50’s best to take stepped as it will be cheaper for at least 5 years before you catch the level premiums up.

The salesperson should give a graphical depiction of both types of premiums so you can clearly see the differences and make a comparison. Make sure you ask for this.

So how much cover do I need?

Calculating the amount of cover is a bit of an art form even if I must say so myself. As I mentioned earlier most people tend to go for debt coverage and that’s all, but this can and probably will leave

your dependents in a debt-free environment thankfully, but, unable to manage the ongoing costs of living.

When calculating insurance cover, it is not only the immediate outgoing one needs to consider, but also the future financial commitments as well.

So let’s look at a method used to help us arrive at the best cover amount for our situation. This method is used by financial planners and applies to life cover, TPD and trauma insurance.

Now obviously there is some tweaking needed depending on which insurance cover you are calculating but all three are relatively the same.

By the way, there is absolutely no rule as to the amount of cover you may select but it is essential that it is enough to give to your dependents and yourself if ever it is required.

The following calculation is for determining life insurance cover;

Firstly, begin by writing down a total of all your debt – mortgages, credit cards, and personal loans – the lot! Once you have a total of your household debt, jot the figure down, and leave plenty of room underneath as we have a few more figures to add.

Next, unfortunately passing away comes at a cost, such as funeral expenses, hospital treatment and so on. We need to provide for these. So our next figure is a reasonable estimate to cover those costs.

Usually, funerals are around $15k so use this as a start. Add another 10k for associated medical costs, obviously, if you want a far more lavish send-off you need to up the ante on this. Write down the figure.

Sadly some of us will be leaving children behind and no doubt both existing and prospective parents plan to give their children the best life possible and that includes a good education.

Therefore as our intention is to educate our kids properly, usually up to the end of high school, we need to create provisions so this can still be possible even though we are not there.

For that reason depending on their ages, we need to calculate a figure per year for school expenses; again this will need to be a bit of a guess if your children are yet to start school.

But once we have the figure, just multiply it by however many years left of school. Now repeat the process for each of your children. Total these figures for education costs and write them on the list.

Okay, all good so far, let’s now look at how we accommodate our other outgoings.

As mentioned earlier, household expenses don’t stop and there is a certain amount of money required each week to support services such as water, electricity, and food, plus ongoing home and car maintenance etc.

We must also consider that the death of a partner would have a profound effect on the one who re- mains and although they may be happily employed now, this can easily change as a result of such an intense event.

Ceasing to work may be the best option to deal with grief and to do so without the concern for money would be the preferred method. It is important to create the ability for this to happen should this be the desired path.

Usually providing a lump sum that generates income enough to satisfy expenses is the method. Okay, a bit more tedious calculating – to begin with, start writing down all of your expenses for a normal year. Include everything such as food, services, petrol, insurance costs, everything.

Remember though, don’t include children’s education and mortgage costs – we have already paid for them! Add everything together to get a total figure.

We now have a reasonable idea of our yearly household expenses that present themselves without fail. Using a realistic long-term average return percentage of 5% pa, calculate how big a lump sum you would need to enable you to earn your yearly expense amount. Write down this amount with all the others.

Okay, time to total our separate amounts to get one lump sum figure. Now, this last figure is a good representation of what your family will need to make sure losing you, will not have any detrimental financial effects on them.

Not finished yet – a little bit more to go!

We have now calculated what needs to be covered by our insurance, but you also have some assets up your sleeve that can be useful.

For example, a car, personal effects, and collectibles. Additionally, any accumulated superannuation funds are released when you die, so start a new column for realisable financial assets. Also, a lot of super funds may have a death benefit included, usually it is pretty basic, but you need to add this if available.

Next, include specific assets of reasonable value that you may own. For example, you may have a vintage car, a coin collection or expensive guitar, whatever it is, it can be sold.

Estimate cash values for all these possessions that are unique to yourself and will be sold on your death. (Yes even that guitar pick John Fogerty threw into the audience during CCR’s 1970 Melbourne concert)

Alright, the last steps; add together all these available funds and then subtract it from the total of your financial needs. You now have a net figure which is the cover you will need.

And why add in the proceeds of saleable items? A financial planners trick! The higher your benefit amount, the higher is the premium cost. If you can cut the benefit amount you will save money, but not at the cost of the correct cover.

We have included all the major financial hurdles to arrive at the proposed insurance amount. You can, however, add or subtract as many provisions as you think right.

As the higher the cover, the more expensive the premium, so it is what your budget can afford. But always think about this more than just covering your mortgage because as shown there is plenty more to worry about!

So, that covers personal insurance. Yes, it is complicated, tedious and probably tiresome to drill down into the minutiae of your financial needs but it is a very important element of any future planning that you and your family undertake.

By the way, on the subject of insurance, there are some hidden traps when applying for travel insurance you need to know. Read this to find out more.

Remember in all these matters it is advisable to seek advice from a licensed financial planner or in- surance broker.

As always, thanks for reading and if you have any comments please do so in the section below. I would certainly welcome them. Homepage

NB Important reminder: this article was written based on Australian insurance products, therefore, it is relevant to only the Australian situation. For those reading this in other countries, I am confident that similar products will be available, but there could be Government regulations that could alter features that I am unaware of. It is imperative to ask questions, read policy documents and consult with professionals to make sure you get this aspect of your family life absolutely correct.