Insurance – Looking after your life and limb

By Nick Bruining

“I’ve got insurance in my super and I probably don’t need any more.”  It’s heard often enough when a financial adviser asks about the level of insurance cover in place.

Insurance for many of us is viewed a little like tax. Something we know we have to pay, but would love to cut as much possible. Unlike tax, avoiding insurance premiums generally means a reduction in cover or not having any at all.

It’s worth looking at the various forms of cover, structures we can use and having a realistic discussion about priorities.

The industry uses the term life insurance to cover distinct policies that might pay out if we die, become permanently disabled, suffer a major trauma or cannot earn income for an extended period.

To make it confusing, the terms life insurance or life cover are routinely used to describe policies that pay out if we die or are virtual certainties to die.

If there’s a diagnosis of a medical condition that will result in death within 24 months, most insurers will pay out all or a significant part of life cover.

For suicide, there’s usually a 13-month exclusion period from the time the life cover policy starts. There might also be an exclusion for suicide if there’s a history of mental illness.

Total and permanent disability generally goes hand-in-hand with life cover. The policy wording typically sets out the specific conditions for a claim to be paid. The most significant difference between policies relates to what you are able to do following the medical event.

Some policies state the claim will be paid when you can’t return to your own occupation at any time, others specify a return to any occupation, a significant and potentially costly difference.

Most life insurance in Australia today is provided through employer super schemes. Corporate and industry schemes usually offer the cheapest cover simply because of wholesale premium rates and a prohibition on commissions.

On a like-for-like life policy, this can result in savings on premiums of up to 30 per cent per annum. In many cases, the super fund’s insurer will transfer the external level of life cover into the super fund’s cover — a little like transferring a no-claim bonus between car insurers.

The other form of distribution is through financial advisers. This has been a highly lucrative for planners, with significant up-front commissions and healthy ongoing trailers.

An ongoing 20 per cent annual cut is not unusual. A number of advisers now strip out commissions on insurance and simply include the service associated with insurance policies as part of agreed flat-fee arrangements with clients.

A sometimes-forgotten but very important form of life insurance is trauma. Quite simply, it pays out a specified lump sum on the diagnosis of specific medical events. Things like paraplegia are included but it also extends to other traumas like severe burns or head injuries.

It also covers other significant medical issues such as a heart attack, cancer or a stroke. Effectively, it provides a non taxable lump sum payment to allow you time to recover.

It can be expensive, is not available through super and the premiums are not tax deductible.