Life Insurance Guide

Life can be complex, hard and confusing, and so can life insurance. Unlike insuring your car for example, which has a fixed value and an easily replaceable role in your family, insuring your life can be more complex, especially when you begin considering all the possibilities which could lead to your loos of income, and how much would be needed to look after yourself and your family in every situation.

What is insurance?

Insurance is when you transfer the risk from yourself to an insurer by paying them a premium, which can be paid every month or every year. When you apply for life insurance you are entering into a contract where you are agreeing to transfer the risk, where your insurer then provides you with a policy which details the coverage of that risk and the costs. If the event occurs for which you have been insured, you make a claim to your insurance company and if successful you receive a payout benefit.

A life insurance policy will only pay out in the event of a claim if your application has been completed correctly and you answered all questions truthfully, to the best of your knowledge. There are a lot of things your insurance company can check up on in your medical history so you can save yourself time and hassles by being honest upfront.

Life insurance is just one form of important coverage you should consider and if you apply for income protection, trauma cover or total and permanent disability insurance through the same provider you can often qualify for a multi-policy discount, sometimes as much as a 15% saving on your premiums. When looking at your premium structure, make sure your insurance provider offers a quote for both level and stepped premiums, as level premiums will start out slightly higher but won’t increase as you age, whereas stepped premiums will increase as your age and risk increases.

What are the features of an insurance policy?

To understand the features of your insurance policy, you need to know about all the facets of insurance which make up your policy, and your agreement with your provider. These include:

• Risk. Everyone faces some form of risk as soon as they get out of bed, sometimes even before. You could be at greater risk of sickness, accident or death and as any of these situations typically result in financial loss, you may seek insurance for these circumstances.
• Premiums. Your premiums are calculated based on your health and medical history and are the amount you pay to your insurer in return for cover when you claim.
• Benefit. If an event you are insured for occurs and your insurance company deems it eligible, you will be paid a benefit of the sum for which you are insured, over a certain period of time specified in your policy, or as a lump sum payout.
• Claim. If you are seeking a benefit for an insured event from your provider, you will need to submit a claim, which will then be assessed.
• Waiting period. If you are making a claim as a result of sickness or an accident, the waiting period will usually begin from the date you first see your doctor or visit a hospital because of the condition. If you delay in reporting your condition you could also be delaying the payout of your benefit.
• Coverage. You are only covered for the specific instances set out in your policy documents, and you will only be paid a benefit amount up to the coverage value you chose at the time of application. Therefore, make sure the cover amount you choose will be enough for all of your bills, expenses and lifestyle needs.

What types of insurance coverage are available?

The type of insurance you need will depend on your circumstances and what you want to protect. Therefore, when deciding which type or level of insurance you need, think about your income, your assets and your debts as this can give you an idea of how long you would be able to survive without your income if you were unable to work. Also consider whether you have a spouse or dependents who rely on your income and wouldn’t be able to pay the bills if you were unable to work through illness, injury or death.

You can then decide whether you want:

• Income insurance. Which can pay a portion of your income for a chosen period if you are unable to work, or work at full capacity.
• Disability insurance. Which can pay an ongoing benefit if you are unable to return to work due to a total and permanent disability.
• Life insurance. Also known as death cover, can include a payout to your family if you or other insured family members die.
• Major illness insurance. Can include a payout if you suffer a trauma and need a benefit to pay your bills as well as your medical expenses.
• Business insurance. You can insure your business for fixed business expenses, or insure a key person in the business to ensure that even if you lost them to illness, injury or death, the business could survive.

What is income protection insurance?

You may view your house or investments as your most important assets, but where would they be without your income? To inure your most important asset income protection insurance can offer an ongoing benefit of 75% of your before tax income, plus super and other benefits. The premiums and cover amount for income protection insurance will depend on:

• Your occupation and how risky it is.
• Your age.
• Your gender.
• Whether you smoke.
• The monthly benefit you want to receive.
• The waiting period you choose. The waiting period is the time before you are officially receiving the benefit of your claim. Normally a waiting period can be 14 days, 1 month, 3 months, or one to two years. If you add an early accident option to your income protection insurance you can be receiving your benefit amount within three days if you are unable to work due to an accident. Just check your policy to see if your insurance company pays a benefit 30 days in arrears, because this could mean that if you have a 30 day waiting period you will actually be waiting 60 days for a benefit payment.
• The benefit period you choose. You can choose how long the benefit will be paid for and you can often choose two to five years, or to receive a benefit until you are 65 years old. Since your premiums are tax deductible, you could be paying just a few dollars more to be covered until you are 65, and that small increase in premiums can mean a big increase in peace of mind.

Should you choose an agreed or indemnity income protection policy?

When choosing the cover amount you can choose an agreed value policy which guarantees you will receive a monthly benefit based on your earnings at the time of your application, and your benefit will not decrease even if your earnings have dropped by the time you make a claim. An indemnity policy can mean lower premiums to pay, but you will be paid a maximum of 75% of your gross taxable income at the time of your claim. If your income fluctuates, an indemnity policy may not be suited to you as you risk a lower benefit if you claim during a slow period.

However, even if you have a secure job with a regular income, indemnity insurance is not always the automatic option. For example, consider the fluctuations you may see in your income if you change jobs or decide to start your own business. As a result, with indemnity insurance you can be paying a premium for a benefit and a level of cover which you may not even receive in full at the time of your claim.

What is total and permanent disability insurance?

If you are unable to work due to a total and permanent disability you can receive ongoing income protection insurance benefits. Every insurance company will determine your level of disability differently and assess your ability, or inability to work.

For example, you may be assessed as having a partial disability which allows you to continue working, but for a reduced amount of time, resulting in a loss of income. You can be defined as partially disabled if you suffer a reduction of 20% or more in your ability to generate income, you have been totally disabled for at least 14 days or from the end of your waiting period, or due to illness or injury your monthly income is less than it was before you became disabled.

Total disability is generally defined as being unable to complete at least one of the important duties of your role which is necessary for you to draw an income, you are unable to perform the important income producing duties for more than 10 hours a week or you are unable to generate at least 80% of your monthly earnings from your personal output at work.

Some total and permanent disability policies will pay advance benefits for certain injuries without requiring you are totally disabled. This means they waive the waiting period so you can receive your insurance benefits immediately in some cases. Just make sure that you understand the definitions in your insurance policy as they can differ depending on your circumstances and your occupation.

Why is income protection insurance important?

You may not think too much about how your income adds up week to week, or month to month, because most of it goes out of your bank account soon enough, rather than adding up. However, if you were unable to work, think about the income you would miss out on until your retirement age if you were earning an average $60,000 annual salary and receiving a 3% salary increase each year:

• If you are 25 years old you will have earned $4,520,000 up to retirement age.
• If you are 35 years old you will have earned $2,850,000 up to retirement age.
• If you are 45 years old you will have earned $1,610,000 before you retire.
• If you are 55 years old you still have the opportunity to earn $690,000 before you retire.

Therefore, consider how much money you would have earned, and how much money you will need to live until retirement and you will see that there are few other places you could get such a sum than from an income protection insurance policy.

What is life insurance?

A life insurance policy can pay out a lump sum benefit in the event of your death or if you are diagnosed with a terminal illness and are unlikely to survive longer than 12 months. Life insurance provides financial stability for your spouse and dependents as long as you have chosen a cover amount which will be enough for all bills and expenses as well as to maintain a lifestyle. To calculate how much life insurance your family would need if you died, add up the following:

• How much would be needed to clear debts.
• How much would be needed to replace your lost income.
• How much your funeral costs will be.
• How much you want to leave to your loved ones for their own use.

Life insurance policies are typically taken out in conjunction with total and permanent disability cover which pays out a lump sum if you are totally disabled and unlikely to work again in the future. The addition of total and permanent disability can mean you need to add cover for:

• Medical costs.
• Adjustments needed for your home.
• A special vehicle which may be required.

You can set up your life insurance payout to cover your loss of income by choosing a cover amount based on your loss of income and a set period of time, for example the replacement of a $60,000 income over 10 years will require $600,000 worth of coverage. Or you can choose insurance coverage which will pay a lump sum which can be invested and the returns will replace your income, for example, investing $1,000,000 at 6% interest can produce $60,000 a year in income indefinitely.

How is total and permanent disability defined?

There are three types of total and permanent disability cover you can choose in your policy. These include:

• An Any Occupation classification. If you are insured for TPD under Any Occupation, you are required to have been unable to work for a continuous period of between three and six months depending on the provider. It also applies where you are unlikely to ever be able to return to your regular occupation, or any other job for which you are suited to through your education or training. Any Occupation is the coverage you will have if you have TPD through your super fund.
• An Own Occupation classification. If your TPD insurance is for Own Occupation coverage you will have been unable to work for a continuous three to six month period, and you are unable to work in your own occupation or in any occupation for at least six months. If your occupation is eligible for Own Occupation TPD insurance compare the costs in premiums for more comprehensive cover.
• Homemaker total and permanent disability insurance. If you perform unpaid work around the home, then your role will still need to be filled if you can’t complete the work, and this can result in costs such as housekeepers, cooks or a nanny.

What is trauma cover insurance?

A serious illness or disease would certainly impact on your ability to continue as the bread winner in the family, and even if you don’t have dependents, you still have bills and obligations to meet. Therefore, if you think you could benefit from a tax free lump sum benefit payment if you are diagnosed with a critical illness or medical condition, trauma cover could be for you.

Trauma cover will offer a payout to ensure you have all the cash you need for treatments as well as your everyday finances so you don’t have to worry about money, and can concentrate on your recovery. It makes sense to apply for enough trauma cover to clear your debts and leave enough money for your medical costs, and life insurance and total and permanent disability insurance can easily be added to a trauma cover policy.

Each provider will cover different illnesses, to differing extents, however, typically a critical illness is one of the following:

• Cancer.
• A heart attack.
• A stroke.
• The loss of limbs, or of sight.
• An organ transplant.
• Multiple Sclerosis.
• A coma.
• Blindness.
• Chronic liver or lung disease.
• Loss of speech or hearing.
• Advanced diabetes.

To make sure you are getting meaningful and comprehensive cover from your trauma insurance policy, look closely at the definitions of each illness and the types of conditions covered, as only some forms of cancer many be covered for example. Also make sure you can reinstate the policy after 12 months when you have survived and beaten the illness, and that your children can be included in the policy.

When working out how much trauma cover you need, consider the following:

• How much you will need to clear your debts and pay for medical costs and treatment.
• Premiums are not usually tax deductible unless trauma cover is part of a business protection insurance policy so make sure you can afford the premiums for the level of cover you want.
• Take into account the cost of your partner or spouse’s loss of income as they may need to work less to take care of you or your children while you are ill.
• Private health insurance covers only enough coverage to pay for your hospital stays and some medical expenses. Private health insurance does not cover long term care, lost income, debts or rehabilitation costs, and there is often a gap and an annual limit to the cover.

What is business expense insurance?

If you are running your own business you will have noticed the drop in productivity and the financial distress which can be present when you are absent for just a few days with the flu. Business expense insurance can pay a benefit which helps cover the everyday running costs of your business if you are unable to work because of illness or injury.

Business expense insurance will usually pay a benefit for 12 months, to give you time to decide whether you are willing or able to return to work at full capacity, or give you time to make other arrangements. Your insurance ensures that while you recover and make your decision, there is still a healthy and well managed business there to sell after a year if that is what you choose. Business expense insurance can cover:

• Accounting and audit fees.
• Bank fees.
• Power bills and water rates.
• Equipment hire and vehicle leases.
• Interest charges.
• Premiums for other business insurance.
• Office leases.
• Rent or mortgage repayments.
• Salaries for staff who are not producing a revenue.
• Professional association memberships.
• The net cost of someone to fulfil your duties.

To calculate the level of cover you need, put a dollar amount next to each of the above expenses to find out how much it would take to keep your business running. Don’t worry too much about how high the final figure is because while every dollar is necessary, every dollar of the premiums is tax deductible so it pays to make sure you have enough coverage for your business. Just keep in mind that business expense insurance is an indemnity policy which means that your insurance will only cover business expenses to their current value, at the time of the claim. As a result you should also make sure to regularly review your policy to make sure your cover level is correct.

What is key person insurance?

As much as many people in business have been made to feel as though they are easily replaceable, especially with the recent global financial events touching millions, the truth is, few people really are easily replaced. To replace someone with specific business knowledge, strong client relationships or stellar sales skills will cost you time and money and without key person insurance could cost your business revenue.

Key person insurance can also be used to set out plans for business succession, estate planning and as a resolution for business loans. A key person can be anyone without whom a business would suffer economically and productively. A key person will have a direct impact on the company’s earnings, or their expertise will be crucial to the successful running of the business.

Key person insurance benefit payouts can be used to:

• Cover a drop in business income.
• Pay for recruitment services or advertisements to find a replacement.
• Ensure business operations continue smoothly.
• Repay business loans.
• Avert a forced sale of the business.

There are two types of key person insurance – one which protects business cash flow and another to protect business capital. Key person insurance to protect business cash flow ensures the business can continue to operate by making up for income which would normally be brought in by the key person. Key Person Revenue insurance can also cover the costs of finding a replacement for your key person. Key person insurance to protect business capital helps the business pay out loans or other debts after the death or disability of a key person.

Your business can also insure their key persons for life insurance, total and permanent disability insurance and trauma cover. However, you may need the help of your business accountant to calculate the tax deductible portion of the premiums and the tax payable on benefits.

What is buy-sell insurance for business?

A buy-sell agreement is similar to having a Will for your business where the business owners enter into a written agreement over the plans for the business if any of the owners die, become disabled, suffer a trauma, retire or resign. Buy-sell insurance is taken out in conjunction with a buy-sell agreement to cover the value of each owners’ share in the business. A buy sell-agreement also allows for the terminating owner or their estate to sell their interest in the business, allowing the continuing owners to purchase that interest.

To ensure your business has the right level of buy-sell insurance, you will need to review the market annually to make sure your cover reflects the market value of each owners’ share. Your accountant, lawyer or insurance advisor who put together the buy-sell agreement will be able to advise on the right level of cover.

Without a buy-sell agreement and buy-sell insurance, your business could face a cash flow crisis if one owner dies or terminates their involvement and the business has to fund their buyout from within.

What is debt reduction and guarantor protection insurance for my business?

When anyone applies for a loan, the lender wants to see how their money will be repaid, and what will happen in the event of your illness or death. Normally with a home loan for example, if you are purchasing a home with your partner or spouse, they are responsible for the whole loan amount if you die, and vice-versa. Just in case, the lender will also take security over your property, so they can claim the home and sell it to cover their losses if you are unable to meet your loan obligations.

In business, you may need guarantors who will guarantee your loan amounts if you are unable to repay the amounts. For example, as the director of the business, you may sign a business loan agreement which is secured against your personal assets, and that guarantee is only removed from your assets when the loan is repaid in full.

If a director of guarantor of the business dies or becomes ill or disabled, with debt reduction and guarantor protection insurance the business debt guaranteed by that person is repaid in full. This protects the guarantor or their estate in the event of a trauma, disability or their death as the insurance benefit removes the guarantee and their personal assets are no longer acting as security for the loan.

When applying for debt reduction and guarantor protection insurance for your business, make sure:

• If all business owners are covered by the insurance, a written agreement will need to be put in place to clarify the obligations of each party.
• You determine how much of the business debt will need to be repaid in order to release a personal guarantee.
• You know whether your bank loan or business overdraft is ‘joint and several’ as this means that each guarantor is 100% responsible for the loan regardless of the size of their business chare and their personal assets will be used as security.

How to Apply for Insurance

You should now have a clear idea of which insurance policies you need for your circumstances and to cover your obligations. Therefore, you are now ready to compare insurance quotes, so make sure you provide all of the information – and the same information – to each insurance company with a simple list of your details, including:

• Your date of birth.
• Your occupation.
• Your qualifications and details of your studies.
• Your gender.
• Whether or not you smoke.
• Your gross income.
• How many dependents you have.
• The value of your debts.
• The value of your assets.
• Your medical history.
• Details of current medication you are taking.
• Any other insurance policies you already have.

Insurance Application Checklist

To make sure you are ready for your application and comparison process, follow these final checklist points:

• Do you need insurance? Most Australians will need some form of personal insurance and if you rely on your income to pay your living expenses or you have other who rely on you, then you should be comparing insurance policies.
• How often should insurance policies be reviewed? Whenever there is a major change in your life you should check your insurance coverage is still adequate. For example, you change jobs, have a baby, move house or increase your debt levels.
• How are previous illnesses viewed? If you have suffered a major illness in the past you may only be able to obtain limited cover, however, seek out an insurance advisor with experience in pre-existing condition insurance for greater success in your application.
• How much insurance can you get if you’re self employed? If you work for yourself you will be able to insure your gross taxable income which results for your personal efforts, including any income paid to your spouse as income splitting.
• Should insurance premiums increase every year? If your insurance premiums are going up every year you probably have a stepped premiums structure and your premiums will continue to increase in line with your age. Instead, ask for a quote on both level and stepped premiums to compare the difference over time.
• How do you choose beneficiaries for your super life insurance? You can make a non-lapsing binding nomination which instructs your superannuation trustee to pay the beneficiaries you choose.
• Is it best to have all your insurance policies in one place? Usually it is best to have all of your insurance policies held by the one provider as you only have to complete one claim for if you are making a claim and you may be able to secure a larger cover amount. Plus many companies offer multi-policy discounts.
• How can life insurance be transferred to a self-managed super fund? You will need to cancel your life insurance policy and the have it reissued to your self-managed super fund as transferring an existing policy can result in your fund being non-complying and cause issues with the Tax Office.
• When can self employed claim life insurance premiums on tax? If your life insurance policy is owned by a super fund you can claim the premiums as a tax deduction because they are treated as a contribution to your super. Just be aware of any contribution limits.
• How can you save on premiums? You can save by paying your insurance benefits annually instead of monthly as most companies will offer around 8% discount. Plus, when you pay for a full year of insurance up front, you can claim the full cost in the same financial year.
• Do insurance policies need to be guaranteed renewable? Guaranteed renewable is an important feature of an insurance policy as it means your insurer will renew your cover without additional medical tests, and regardless of changes in your health or claims made.
• Do Australian insurance policies cover you overseas? Unless your policy specifically precludes it, anything which happens to you while you are overseas is claimable on your insurance.
• Can premiums go down if you stop smoking? Yes, once you have quit smoking for 12 months you can apply to your insurance company to have the premiums reduced, and you will have to sign a statutory declaration.