From Money Magazine, May 2006
How would your family cope if suddenly you could no longer work? Personal insurance is a necessity for most of us. The trick is to get the best-value policies. Maria Bekiaris explains how.
Australians suffer around 48,000 strokes each year that's one every 11 minutes. Pretty scary, right? Equally scary is the fact that one in three men and one in four women will be diagnosed with cancer before they reach 75.
Most people don't think it will happen to them and don't arrange appropriate protection. The importance of personal insurance such as life and income protection insurance is underestimated, which is why under-insurance is such a big problem in Australia.
"People tend to insure what they think is an important asset such as their car or home, but don't realise their most important asset is their ability to earn income," says ING's executive director risk, Helen Troup.
Think about this: you insure your car because you might be in an accident but what about the driver, says Troup.
"It comes back to having the security and power to survive financially if illness or sickness affects you or your family," says Troup.
Many people feel depressed if they are sick; imagine how much worse it would be if you had financial problems as well, she adds.
General manager for MLC insurance, Greg Einfeld, naturally agrees.
"Getting sick is an emotional time but to have financial difficulties just compounds the problem," he says.
Jodi Murray, manager sales marketing-insurance for TowerLife, says while having insurance won't change your diagnosis, financially you have a choice about how you recover. Maybe your partner can take some time off work or you can pay for complementary treatments, she says.
There are four main personal insurance types available all important in their own way. There's life insurance, total and permanent disability (TPD), income protection and trauma insurance.
Let's take a closer look:
Life insurance should probably be called death insurance. If you die, your beneficiaries will receive a lump sum payment. This applies to most illnesses or conditions or an accident but not suicide.
As the Investment and Financial Services Association (IFSA) explains, adequate life insurance means your family will not be burdened by debt and will be protected from selling assets to pay outstanding debts or to cover living expenses should you die.
If you are diagnosed with a terminal illness, some policies will pay the benefit earlier. "This could significantly improve your quality of life and ease the burden of medical bills and other commitments on your family prior to your death," says the Insurancewatch website www.insurancewatch.com.au.
Total and Permanent Disability (TPD)
TPD cover is usually an optional extra on your life insurance policy. It pays you if you suffer some sort of injury that means you can't work again. It's vital to understand whether it applies to just your own occupation or any occupation. As the name implies, under your "own" occupation your claim will be paid if you can't perform your own occupation. With "any" occupation you might not be paid if you can still work, even if it's not in the area you worked in before or trained for. For example, a dentist who damaged his eye may not be covered under "any" occupation because he can still perform other jobs.
Income protection insurance pays you a regular income, usually up to 75 percent of your regular income, if you can't work because of an illness or accident. Often income protection doesn't specify a list of conditions covered, so you may even be paid for temporary illnesses such as back injury and stress-related illnesses, says Insurancewatch. Payments are made fortnightly or monthly as income, not as a lump sum.
The main issues to consider when taking out income protection are the benefit and waiting periods. The benefit period is the length of time you'll be paid benefits. The most common terms are two years, five years or until you reach 65. Obviously those with two- or five-year benefit periods are cheaper, but it's important to make sure you have adequate cover in place. Also, if you insure to the age of 65 make sure there is indexation for CPI.
Waiting periods range from 14 and 30 days to as long as two years. If you have sick leave you can use some of that up first because the shorter the waiting period the more expensive the premium. It's also worth finding out if the benefits are paid in arrears this means a 30-day waiting period might mean you don't get paid until 60 days.
You should probably find out whether the policy is guaranteed renewable. This means that the policy can't be cancelled as long as you pay your premiums even if your health changes or you make repeated claims, although the premium can be increased. Also ask if claim offsets apply from any other income you may receive. For example, if you get workers compensation or social security the insurer may reduce the benefit so you're being paid no more than 75 percent of your income in total. Finally, check whether you need to keep paying the premium during the claim period most insurers will waive this.
Trauma, or critical illness as it is often called, pays a lump sum if you are diagnosed with a specified disease or suffer some sort of trauma. The conditions covered depend on the policy but it includes the main illnesses such as cancer, stroke or heart attack as well as conditions like Alzheimer's Disease, Multiple Sclerosis, burns and Parkinson's, for example. You'll need to look at the fine print of the policy to confirm exactly what's covered the fewer conditions covered the cheaper the premium is likely to be.
Some policies offer something called a buyback option if you've made a claim and it has been paid, you can re-purchase insurance. You have to pay extra for this feature and you have to organise it upfront.
"Normally only one trauma benefit is ever payable to an individual after a payout you may become uninsurable and no longer able to buy Death, Total and Permanent Disability, Trauma or Income Protection cover from any insurer," explains Insurancewatch.
"So it is important to either purchase a buyback option or have sufficient cover to enable you to live out your remaining life on the proceeds of the claim."
For the complete story see Money Magazine's May 2006 issue. Subscribe now.
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