Insurance – let's look at the details

Insurance – let's look at the details

In the last edition of talkingsuper we explained the importance of having life insurance, how much cover you need and reasons why you may want to change your level of insurance cover.

In this article we go into more detail around the types of insurance cover available and things you should consider when buying cover. We look at what events are and aren’t covered, and how your medical history may affect the cost of your insurance.

What are the types of cover and what do you need to consider?

Death cover

Also known as 'life cover', this type of insurance pays an amount of money to your beneficiaries when you die. Most death cover policies also include ‘terminal illness’ cover which means you can make a claim if you’ve been medically diagnosed and are not likely to survive for 12 months or more. Terminal illness benefits received before you die are always tax-free and you can control who the money goes to and how the money is spent.

Considerations:

Level of cover – think about your family’s needs if you were not around. Things like repaying debts, covering their future needs, such as the cost of your children's long-term care as well as providing funds to invest to generate an income or to keep your business afloat. Even if you don’t have anyone who is dependent on you financially, your death insurance could cover funeral costs and give someone you love an inheritance.

Medical history and exclusions – some insurance policies have general exclusions such as ‘dangerous activity’ meaning if you die doing an activity they deem as dangerous, for example, skydiving, you will not be covered. Insurance companies will normally ask you to be ‘underwritten’ by completing a medical history form. The underwriting process allows the insurer to assess how much risk is involved in insuring you based on the chance you’ll get a serious illness. If you’re a smoker or have a family history of a certain disease, then your cover may exclude certain diseases.

Note: if you don't provide details of your medical history, your policy may not pay out when you need to claim, this is more likely if they believe you intentionally did not provide those details.

Generally, death benefits received from super that are paid to you, your spouse or non-adult children dependents are tax-free.

Total and permanent disability cover

Total and permanent disability (TPD) cover pays a lump sum to help you with the cost of rehabilitation, equipment and living costs if you become totally and permanently disabled and can never work again. You usually can’t have TPD cover without life cover as they are packaged together.

Considerations:

Level of cover and medical history and exclusions – The considerations for TPD insurance are similar to death insurance cover in that you should consider the level of cover you may need if you were disabled and any medical history and exclusions such as dangerous activities you may participate in.

If you receive a TPD benefit payment through super and are under age 60 your payment will be subject to tax. If you make a TPD claim and are likely to receive a TPD benefit you should speak to your financial adviser and tax professional before requesting the full benefit to be paid as a lump sum. There may be options to reduce your tax liability.

Income protection

Also known as ‘salary continuance insurance’, income protection provides a portion of your income if you are unable to work due to injury or sickness for a certain period of time. The portion of income could be up to 75% of your salary depending on the policy.

Considerations:

Waiting period - Income protection policies always have a waiting period which is the time you must wait from when you make a valid claim, to the time you become eligible to start receiving payments. Depending on the policy, the waiting period can range from 14 days to two years. You can usually choose the waiting period. The shorter the waiting period, the more expensive the premium.

Payment period - The payment period can also change. For example, some policies only pay for a couple of years while others will pay up until you reach age 65. The longer the payment period, the more expensive the premium.

Level of cover and medical history and exclusions – The considerations for income protection are similar to death insurance cover in that you should consider the level of cover you may need if you were unable to work for a long period of time and any medical history and exclusions that may apply.

Generally, income protection benefit payments will be taxed at your usual marginal tax rate. If the payment is made through super, the super fund will withhold tax at your marginal tax rate and advise the Australian Taxation Office (ATO) so you don’t have to pay this tax later out of your pocket.

Cost of cover

The insurance premiums you pay may differ, depending on factors such as:

  • your age and gender
  • whether you are a smoker including if you are a ‘social smoker’
  • the type and amount of cover you have
  • your occupation – generally the more manual and riskier, the higher the premium
  • your health and medical history

Your insurance premium will normally be reviewed and recalculated by the insurer on 1 July each year to take into account changes to your age and salary. The new premium will be shown on your account online and on your annual benefit statement.

Insurance cover and options only available outside of super

Trauma cover

Trauma cover - also known as'critical illness cover' is only available outside of super. This cover pays a tax-free lump sum if you are diagnosed with a certain illness or seriously injured in an accident that has a significant impact on your life, such as cancer, a stroke or head trauma.

While income protection helps to replace some of your income when you cannot work due to illness or injury, trauma cover provides a lump sum of money to cover your immediate medical and financial needs or allows your partner to have time off work to support you, without a waiting period.

While trauma cover is not available within super you can apply for trauma cover outside of super with the help of a financial adviser.

Stepped versus level premiums

Insurance premiums usually increase with age because the older you get, the more likely you are to make a claim.

For death, TPD, income protection and trauma cover that you purchase outside of super you can usually choose between stepped or level premiums.

  • Stepped premiums - Your insurance premium increases each year. Depending on your age, your policy and other factors, your annual premium could increase by hundreds of dollars in just the first few years. For people over 50, stepped premiums can double every 5 years. If you're thinking about this option, consider how long you intend to hold the insurance for, to make sure you can afford the rising premiums.
  • Level premiums - Your insurance premium does not change as you age but is generally more expensive than a stepped premium at the start of cover. Level premiums may increase over time due to inflation (which you can opt out of) or changes to the insurer's cost base, for example, where actual claims paid exceed expectations. Even so, total premiums paid over your working life (say 15 to 20 years or more) will be significantly lower than the equivalent stepped premiums.

Tip: Consider level premiums if your need for cover is greater than 10 years.

Own-occupation versus any-occupation TPD

When purchasing TPD insurance outside of super you may have the choice between ‘own-occupation’ or ‘any-occupation’ cover.

  • Own-occupation – If you have own-occupation TPD cover, for a claim to be paid you must prove you have a total and permanent disability that prevents you from ever working in your own occupation. You need to specify your occupation when applying for the cover.

    Own-occupation is a more liberal definition of disability because, even if you can work in a different occupation, you may still be eligible to receive disability benefits. For example, if you are a surgeon and lose a hand in an accident, you can no longer perform surgery so you would likely receive a TPD payment even though you could potentially teach surgery.

    Own-occupation coverage is more expensive and can only be purchased outside of your super fund so you would need to pay for the premiums from your after-tax income.

  • Any-occupation – If you have any-occupation TPD cover, you must show you are totally and permanently disabled and unable to work in any occupation for which you are suited to based on your education, training and experience. For example, if you are a surgeon and lose a hand in an accident, you can no longer perform surgery but you can teach surgery, so you may not receive a benefit payment.

    ‘Any-occupation' is the cheaper of the two TPD options, however it can be more difficult to meet the requirements of this type of disability definition. This type of insurance can be purchased using your super fund.

Tax on insurance held outside super

Other than income protection benefit payments which are taxable as income at your marginal tax rate, benefits received from other cover types are usually tax-free as long as they are received by you or a family member. You should always speak to your financial adviser about whether tax may be payable on insurance benefits before receiving any claim payment.

When you're buying life insurance, don't feel pressured to make a quick decision - especially if you've received a call from an insurer out of the blue. Always ask for the product disclosure statement (PDS) and seek advice from a financial adviser.

Check your insurance cover

At IOOF, we offer death, TPD and income protection cover to eligible members through a leading Australian insurer called TAL Life.

To find out how much insurance cover you have, check your recent super benefit statement or log into your account.

Please contact your financial adviser available to you through your super account before you make a decision about your insurance cover or contact us and we can help.