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Insurance proves the best policy

LIFE insurance is a bit like retirement planning. It doesn’t seem relevant when you are young, but at some point you realise that it needs to be sorted out.

There are four kinds of insurance that fall under the life insurance banner – death cover, total and permanent disablement (TPD), trauma and income protection.

Ben Devenish, of financial advisory firm Gannon Growden Schonell, believes that death cover and income protection are both critical in any family’s or individual’s planning.

He characterises TPD and trauma insurance as less critical, with their suitability depending on individual circumstances.

Death cover is comparatively straightforward – an agreed amount is paid if the insured person dies during the term of their policy.

Income protection is a more complicated area. As the name implies, it provides for regular (eg monthly) payments if the insured person is unable to work and earn their normal income.

A common misconception is that workers’ compensation cover is sufficient, but this only covers work-related injuries, which typically form a smaller part of claims for white-collar workers. Income protection is far more comprehensive.

Income protection is particularly appropriate for families with large debts and a single breadwinner. It means that mortgage payments, school fees and other ongoing bills can continue to be paid, even if the breadwinner is not working.

“With income protection insurance, the policy definitions can be very complex and need to be studied closely,” Mr Devenish said.

TPD insurance, which can be an optional extra to death cover, is also characterised by complicated definitions.

Mr Devenish said about 50 per cent of TPD claims were denied by insurance companies because the claimants fail to satisfy the narrow policy definitions (see story below right).

An added reason for the low success rate is that a period of six months must elapse before a TPD claim can be considered.

Trauma insurance provides for an agreed lump-sum payment if the insured person suffers one of the defined events in the policy.

The events include major medical conditions such as a heart attack, cancers and strokes, which normally stop the person from working and may require expensive medical treatment.

Mr Devenish said trauma insurance was not always warranted, especially if someone had liquid assets (eg shares they could sell quickly), minimal debts and substantial accrued leave.

The long-term nature of insurance contracts means that the financial stability and viability of the insurer must be beyond question. Last year’s collapse of HIH highlighted this point.

Mr Devenish recommends that cost should be the last consideration, after people have assessed their insurance requirements, the relevant policy definitions and the financial strength of competing insurers.

Once a short-list of comparable policies has been selected, only then should cost be the deciding factor.

The following example illustrates the insurance premiums for a 39-year-old male accountant, seeking income protection (a $5,000 monthly benefit with a 30-day waiting period) and death cover ($500,000).

For a non-smoker, the annual premiums would be $475 for the life insurance and $1,026 for the income protection for good quality policies.

For a smoker, the premiums would be much higher, at $1,020 and $1,358 respectively.

Many superannuation funds offer life insurance to their members, with highly competitive premiums. Mr Devenish cautions that, while the premiums are generally lower, the policy definitions may not be the most appropriate as a “one size fits all” approach is taken to disability definitions.

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