Insurance? Got some/Don’t need it/Too expensive… Thanks anyway – Part 2

For everyone else, if your memory is a little muddied, let’s recap: we have looked at the realities of Trauma and TPD, what risks or events they are designed to insure against, the affordability of insurance premiums, and of course, how annoying it is to pay for insurances in the first place – remember the “spending money on air” comparison? You might get by now that I like to call things how I see them, you can take it or leave it and you don’t have to agree. I only want to have an honest conversation about personal insurance because I believe there are a lot of misconceptions and misinformed beliefs out there, and what a shame that is. These things are more complicated than they initially seem, and how else are you meant to really see that unless someone sits down and gets transparent with you? So, let’s continue to ‘get real’ with it.

Picking up where we left off, let’s jump straight back in… to Income Protection. This insurance is payable for any sickness or injury preventing you from working and more beautifully, you can claim this one at the SAME TIME as other policies, because it is related to your ability to work. If you are on Trauma or TPD claim, you obviously can’t work, so you can also be on IP claim. Ta da! More air turning into money. But like Trauma, Income Protection, is expensive for two reasons:

1. You are more likely to claim on it, and
2. You can be on IP claim until age 65, so the insurer needs to be able to ensure it can continue to pay for all those years, should you need it.

You do need to check your IP though, to make sure it does cover you to Age 65. It might not, in fact, if it is inside your super fund and you never actually applied for it, bad news, it probably doesn’t. It might only cover you for 2 or 5 years. You also need to check the waiting period. It might be 30 days, it might be 60 days or it might be 90 days, sometimes even longer. This is where most people scratch their heads. “What do you mean I have to wait 30 days to receive my Income Protection payments?!”

It’s important that you know and understand this waiting period concept BEFORE you need to claim. Small but major point here: most Product Disclosure Statements (PDS’s) declare that they will pay your Income Protection payments monthly in arrears. So that 30-day wait, is really 60 days. Who can say that they are able to wait for at least 60 days (if not 120 days) before receiving their IP payment? That’s surviving at least two months of mortgage payments, never mind feeding yourselves. Hands up who thinks they will default on their mortgage before they will see their first IP payment?

You also can’t insure 100% of your salary because the insurers aren’t silly, they WANT you to go back to work, so the maximum you can get is 75% of your salary package. Oh, and you’ll be taxed on that income too. I take it you’re not loving the idea of your impending pay-cut right when you need to stay positive so you can rehabilitate and recover more quickly? Good news, there is a way to effectively replace 100% of your income but you’ll need to speak to a good adviser to do that. Of course, I’m available if you don’t currently have one.

But wait, there’s more… do you know what type of Income Protection cover you have? If I said the words “Indemnity” and “Agreed Value” would you know what I was talking about? Indemnity is the default type of IP that you find in your industry super funds and employer super funds. If you need to claim on this cover, you will need to provide financial evidence to prove what you earned, so they know what to pay you. You will receive the lower of the sum insured or 75% of your previously received 12-months’ salary package (uncool if you recently had a pay rise). If you were on $77,000 salary package and 2 months ago started on $88,000 salary package, you’ll get 75% of $78,834 paid monthly ($4,927 per month), unless of course, your super statement says your IP cover is $2,500 per month, then you’ll just get $2,500 per month. That sucks.

On the other hand, you’ve got Agreed Value IP policies. Instead, you submit financial evidence when you apply (not when you claim) and the insurer agrees to pay you the sum insured guaranteed. If your sum insured is $5,000 per month but you recently took a pay cut, doesn’t matter, you will still receive the $5,000. I prefer this outcome, what about you?

Finally, Life insurance, the simplest of the covers. You die, the claim will be paid. It is as easy as filling out some forms and sending a Death certificate with some proof of ID. Morbid, I apologise, but I did say I was going to be honest. There’s not much extra light to shed on this cover, it is probably the most straight forward and easily understood of the personal insurances. You can get it early if you are deemed ‘Terminally Ill’ by two independent doctors, but it also depends on the insurers definition of Terminal. Some insurers say death must be expected within a 24-month period, and some will say within a 12-month period.

Pulse check: who’s starting to wonder if they really know what kind of cover they’ve got? Or if it is right for them? What if I told you, we have only scratched the surface? I haven’t even started on the insurance infomercials… I recently attended a seminar where I was not the target audience, but a business partner of mine was, and had I not been there, he may have left that seminar thinking he could give “General Advice” in this area and that personal insurance was “simple”… I didn’t know whether to laugh or leave I was so shocked.

This is definitely not an area you can talk ‘generally’ about. I need to know your situation: how much debt you have, what you earn, how many kids, do you want to send them to private school, what assets you would keep or sell if you couldn’t work? I need to put myself in your shoes and I need to work with you to uncover what you would need to ensure you don’t have to sell your home or give up on your dreams if you couldn’t work. How can you be general about that? How can you not get personal about that?

I know this can be heavy as far as content goes, so let me wrap it up. If you have debts and/or a family (or are planning for one) then Life and TPD will be important to you. As your debts decrease and your kids leave home, this cover will become less important to you. Maybe you don’t need it until retirement, great! Let’s check in at least once a year so we know when to start reducing it.

If you work, Trauma and Income Protection policies will be important to you. They will be important to you for as long as you foresee that you will be in the workforce. They are important to you because YOU EXIST, because you wake up every day and breathe air, and you require an income to keep on living. Remember that the next time you feel like you are just paying for air, because wouldn’t you rather do that if it helps you to keep breathing it later on? I would.

By the way, if you don’t have personal insurance, you are basically deciding to be your own insurance company, it’s called self-insurance, just make sure you can pay your own claim and you’ll be fine. What about Centrelink, I hear you ask? Don’t count on it, they recently rejected four different applications for assistance by a family I was helping pro bono who are dealing with a Cancer diagnosis. Through some loophole, he was unable to claim the Sickness Allowance even though he’s actually sick and undergoing treatment. Unfortunately, they didn’t have a single insurance policy hiding in any of their supers when I met them. This is my worst nightmare because there is nothing I can do about it; it is simply too late. This might be where you start thinking Mum and Dad would bail you out (if they’re still around that is). I guarantee you, this is the last thing they will want to do, and yet, they will sacrifice anything and everything to come to your rescue. Don’t be that person. Be the smart, independent individual your parents raised you to be. Protect yourself and be your own hero.