Mind The Gap – Chances are, you’re underinsured*
by Matthew Congiusta
Research shows that an alarming number of Australians don’t have personal insurance cover; and those that do simply don’t have enough. There is a lack of education in this area and often a false sense of security as individuals ‘think’ they are protected by certain means (e.g. private health cover, insurance in super etc.) but in reality, there is a significant gap between the protection they have and the protection they need. Often the realisation of this gap occurs when it’s too late, causing havoc to the individual and their family.
So what are some of the areas that provide this false sense of security and the common misconceptions of insurance, resulting in individuals deciding not to obtain necessary cover? We often hear the following:-
"I’ve got private health insurance, that’s all I need"
This will help you to pay a portion of your medical bills, but what about living expenses, mortgage repayments and education expenses, just to name a few?
"Workers compensation will look after me"
The majority of serious accidents actually occur outside the workplace. As a result, work cover would not apply. Even if the injury was sustained at work, workers compensation may not be enough in terms of the amount paid and the period of payments; for you and your family. If you are self-employed, you may not even have this cover.
"I already have insurance in my super or my employer has insurances organised for me"
When it comes to insurance in your super, it’s important to check the amount and type of cover you have. The amounts may not be adequate for your needs; it may not include some types of cover, specifically trauma insurance; and the claims process can be quite restrictive too. The cover in super may be better than nothing at all, but when it is ‘automatic’ and ‘low cost’, you have to question the quality as well.
Generally, insurance cover in super or provided as an additional benefit by your employer, is calculated with a formula based on a multiple of your age and salary. Although it is an additional advantage to work for an employer that offers these types of incentives, the formula used is a ‘one size fits all’ approach; and does not take into consideration your personal circumstance and details such as the amount of your mortgage, how many children you have, your credit card debt etc. Therefore, it is also worth reviewing your automatic or employer selected insurance cover, as often it is worthwhile to apply to increase your sums insured; or perhaps to apply for additional types of insurance that aren’t included.
"My spouse doesn’t work, so they don’t need any insurance cover"
Even if you or your partner don’t earn a salary, you both support the family. If a non-working parent dies or is disabled, the family may need to increase spending on childcare, cooking, cleaning and other household tasks that were previously done by this person. The cost of employing people to provide childcare and domestic services can easily add up to around $600 a week1, depending on the age and needs of your children. You also need to factor in the extra medical costs not covered by health insurance. This needs to be taken into consideration when you consider your family’s total insurance needs.
"My grandparents/parents lived to old ages and cancer, heart attack and stroke don’t run in the family"
While cancer, heart attack and stroke are the main source of claims across all three of the Death, Trauma and Health Event insurance categories; more than 60% of Income Protection claims are the result of musculoskeletal injuries2.
"I’m young, I’ll worry about insurance when I’m older"
Insurance is based on maths, the insurance companies agree, the younger you are, the less chance you have of making a claim. This then means that the premiums are cheaper!
However, we note the following based on claims paid by Macquarie Life (insurance company) over the past 5 years:
50% of all income protection claims are paid to individuals under 402;
Nearly 60% of Health Event claims (ranging from conditions such as heart attacks and digestive conditions, to stroke and depression) are paid to individuals under 502.
It is important to lock in suitable cover when you are healthy as it may be more difficult to obtain cover in the future when you are older, not as fit or may have a medical condition. Another thing to consider is ‘level’ premiums. As you are young, you can potentially set a level premium now that will not increase as you get older.
"I’m single and I have no dependants, I don’t need to provide for anyone else"
Excluding Life insurance, the other types of personal insurance, namely Total Permanent Disability (TPD), Trauma and Income Protection are actually there to protect YOU. These types of insurance will ensure that if you suffer a trauma event (such as cancer, heart attack etc.) and/or are unable to work due to sickness or injury, you will receive cash to fill the gap, essentially taking the financial stress away, so that you can remain independent and concentrate on getting back on your feet.
"Insurance is too expensive, I’ll just hope for the best"
It should not be an ‘all or nothing’ decision. Even if you can’t afford as much insurance as you need, or the top cover with all the ‘bells and whistles’, you can still afford ‘some cover’. Some is better than nothing and certain types of insurance cover can be paid by your superannuation, while other types are 100% tax deductible when held in your own name, outside super. With the right advice, you can structure your insurance plan to have as little impact as possible on your cash-flow and also be tax effective.
"I’m too busy, I see heaps of adds on the TV promoting insurance, when I have a spare 5 minutes I’ll just call the number and get some cover"
Direct insurance, which means the consumer has obtained the insurance cover direct from the provider (e.g. over the phone), without the assistance of a financial adviser, is what you see being promoted on your TV. It may seem like an easier option, to apply for insurance from the comfort of your home. However, this method really is a case of ‘buyer beware’. Direct insurance is often poor quality cover and lacks in many areas, however consumers may not find out until it’s too late.
Direct insurance is designed to be quick and easy, whereas insurance cover that is designed to be recommended by a financial adviser (retail insurance) is more thorough, flexible, covers more conditions and contains many more features than direct insurance.
With retail insurance, your adviser is able to tailor a solution to suit your needs and individual circumstance. Here are some examples of the differences between direct and retail insurance:
People with direct insurance often have lower levels of cover as they have not discussed their insurance needs with an adviser. This leaves them underinsured and open to the risks they were trying to protect against.
With direct insurance, upon application there is limited underwriting (due diligence of the insurance company during the application process) and no medical tests. Therefore, often underwriting is done at the time of claim. If, at the time of claim, the insurer finds that this person does not meet the requirements to have obtained cover initially, the insurance company may not pay the benefit.
With direct insurance, there are often exclusions for pre-existing medical conditions. Again, these pre-existing conditions can be found at the time of claim, rather than during your application, which means that the person would not receive the insurance benefit, even though they have been paying premiums for the cover since taking out the policy.
Retail insurance offers more features, definitions, claimable events and longer benefit periods than direct insurance.
Retail insurance offers both ‘stepped’ and ‘level’ premium structures, whereas direct insurance offers ‘stepped’ premiums only.
Direct insurance premiums cannot be paid by super. Retail insurance premiums can be paid by super (dependent upon the type of cover) which is both tax effective and assists with cash-flow.
With retail insurance recommended by a financial adviser, claimants and their families are assisted through the process at claim time. With direct insurance, it is up to the claimant or their family to try and figure this out for themselves.
The average cost of comprehensive car insurance in Sydney is approximately $1,2003 as calculated by RateCity (independent rate comparison website). This calculation was based on a 30 year old male driving a Toyota Corolla worth $20,000 to $30,000.
Most of us insure our car as we consider this a valuable asset. But what kind of personal insurance can you get for about the same price, and which is actually more valuable to you?
Based on a 30 year old male in good health, working in an office job earning $80,000 per annum; we came up with the following insurance solution with a total cost of approximately $1,200 net4:
$850,000 Life and Total Permanent Disability insurance
$150,000 Trauma insurance
$5,000 per month Income Protection insurance, payable to age 65 (that’s potentially 35 years!)
The above insurance cover could result in a potential total payout of more than $1,000,000 to this person and their family. What is more important, a Toyota Corolla, or the peace of mind to know that you and your loved ones are taken care of, should the unforseen occur?
So what should you do to ‘fill the gap’?
Work out your insurance needs – consider your debt, current expenses, future expenses including unfunded increased medical costs, lost income etc.
Review the types and levels of insurance you already have
Once you’ve calculated the insurance gap, work out the best way to fill it by adjusting insurance cover from existing policies and/or commencing new cover. This is also a good opportunity to review your current cover to see whether there is better value for money in the market.
It is best to consult a professional to construct an insurance plan which fits all the pieces together including types and levels of cover, how premiums are paid and the policy features. In this way, should anything happen and you are in need of an insurance benefit, you won’t be faced with a massive shortfall. Please contact Financial Keys if you would like assistance with the above.
*95% of families do not have adequate levels of insurance’ (LifeWise Natsem Underinsurance Report, 2010)
1 Insuring the value of unpaid work in the home – Genesys article June 2012
2 Macquarie Life
3 RateCity – Independent Comparison Website
4 TAL Insurance – Quote completed February 2014
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