Life Insurance; Guide & Terms You Should Know

TPD pays a lump sum to assist with rehabilitation costs, debt repayments and future living costs if you are totally and permanently disabled. TPD is often bundled with life cover. It is important to note that TPD is usually offered in 2 definitions, ‘own’ or ‘any’. TPD ‘own’ means that you cannot work again in your usual or own occupation. TPD ‘any’ means that you cannot work in any occupation. For this reason, TPD ‘own’ cover is more expensive.

Trauma Cover

Trauma provides cover if you are diagnosed with a specified illness or injury. These policies include the major illnesses or injuries that will make a significant impact on your life, such as cancer or a stroke. It is also referred to as ‘critical illness cover’ or ‘recovery insurance’.

Income Protection

Income Protection Insurance can provide you with up to a 70 per cent replacement income if you are unable to work due to illness or injury.

Income protection insurance is designed to replace your income based on your annual earnings in the 12 months prior to your illness or injury.

You can spend the benefits as you choose, and premiums are tax-deductible, reducing the overall cost of your insurance.

See more here.

Income Protection is a better cover than Workers Compensation. It provides overall cover, whereas Workers Compensation only covers work accidents and injuries that occur at work. Workers compensation generally does not cover time off work due to illness or accidents that occur outside of the workplace.

Indemnity versus Agreed Value

Income protection policies are either an:

Indemnity value policy — the amount you’re insured for is a percentage of your salary when you make a claim. If your salary has decreased since you bought the policy, you’ll get a smaller monthly insurance payment. If your income is variable, your insured amount will be based on average annual earnings over a period of time appropriate for your occupation.

Agreed value policy — the amount you’re insured for is a percentage of an agreed amount when you sign up for the policy. These are generally more expensive but can be useful if you have income that changes from year-to-year.

From 31 March 2020, insurers can no longer offer agreed value policies to new customers. If you purchased an agreed value policy before this date, you can continue to hold this policy. If you decide to change policies, you will only be able to purchase an indemnity value policy.

See more here.

Standard versus Comprehensive Cover

Standard cover only covers basic features such as the benefit are payable in the event of total disability, partial disability, rehabilitation and unemployment.

Comprehensive cover covers in addition to the basic cover which includes accommodation, family support, home care and specific injuries benefits. Hence, the premium for a comprehensive cover is higher compared to the standard cover.

Cancellable Income Protection Insurance is a policy which may be cancelled and covers you for a short period. The insurance is available from a general insurer. Cancellable income protection insurance may be cancelled at the time of renewal by the insurance company as a result of a health risk, such as a heart attack or development of cancer during the year. This type of insurance is particularly useful to professional sportspersons who may be playing a different sport, or for another club, during the off-season from their usual team.

Non-Cancellable Income Protection Insurance is a policy which guarantees cover to a selected expiry date in return for payment of a premium. Only the insured can void the policy by way of cancellation letter or non-payment of premiums. You must consider Income Protection insurance to assist in covering your financial commitments to ensure that sickness or accident will not create undue hardship or jeopardise your lifestyle.

Waiting period

This is the amount of time you must wait before your payments start. Most income protection policies offer a waiting period between 14 days and two years.
You must be unable to work as a result of your illness or injury at the end of the waiting period to be eligible for payments.

In general, the longer the waiting period, the cheaper the policy.
When you’re choosing the waiting period, think about how much you have in sick and annual leave, savings and emergency funds.

Benefit period

The benefit period is how long the monthly payments will last if you remain unable to work due to your illness or injury.
Most income protection policies offer two or five years, or up to a specific age (such as 65).
The longer the benefit period, the more expensive the policy. But it also means greater protection if you’re unable to work for a longer time.

Underwriting

Underwriting is the process the insurance company takes to evaluate the risk they are taking by insuring you. Underwriting is specific to your personal health, lifestyle, occupation and extra curricular activities.

Each of the above categories has a scale from low risk through to high risk, which will have a direct affect on the premiums you pay. When it is deemed by the insurer that there is excess risk to insure you as an individual, they will generally charge a loading on your premium to account for these additional risks.

Some examples of things that could increase your premiums include being overweight, have prior medical conditions, being a smoker or heavy drinker, working in an occupation deemed higher risk or if you are involved in sports or hobbies that may increase your chance of injury, sickness or death.

Total and Permanent Disability Definitions: Any vs Own

Any Occupation

‘Any’ occupation definition is where the insurer takes into account all of your training and experience you may have when determining the extent of your disability, and your ability to be engaged in employment for which you are trained. Generally, this is any job (so you can be over qualified for a lower skilled occupation).

Generally, the benefit will only be paid if you are not able to engage in employment in any occupation that you are reasonably qualified for regardless of your occupation at the time the claim is made.

Any occupation can be held inside superannuation and outside superannuation.
The premium is generally cheaper, but it has a higher threshold to claim (that is, you are unable to do any job that you are qualified for), and as such, it is less likely that the insurer will payout.

Own Occupation

‘Own’ occupation provides a superior definition of TPD insurance. It generally means that you receive your insurance payout if you are deemed to be unable to work again in the job you were working in as your occupation prior to your disability. This cover is more expensive as it is easier to show that you are not able to work in the job that you were qualified for and working in before disability.

For example, if you hold a qualification (either university or TAFE / trade), and you can not longer do that particular qualification, but you can work in general retail (like stacking shelves) then you would not meet the definition of Any Occupation, but you would meet the definition of Own Occupation.

Own occupation can only be held in your personal name.

Life Insurance and TPD can be held inside superannuation, as it is held to provide benefits on the death or disability of a member of a superannuation fund.
But, there are two issues that need to be considered:

a) The TPD definition of your insurance policy; and
b) The TPD definition for superannuation funds to release the payout.

There have been cases where an Own Occupation policy has been held inside a superannuation fund. The problem with this holding structure is that in the event that there is a claim made, the insurance proceeds are paid by the Life Insurance Company to the Superannuation Fund. But, the Superannuation Fund is not allowed to payout the insurance proceeds (as they become part of the superannuation balance) as the TPD definition for Own Occupation generally does not satisfy the Superannuation Industry (Supervision) Act 1993, and the related regulations.

Generally (and for any new policies taken out) Any Occupation is held in Super, and Own Occupation can only be held outside Super.

TPD Superlinked:

A number of insurers are acutely aware of the desire for clients to hold an Own Occupation policy, but to have the tax benefits and cashflow of an Any Occupation policy.
The Super-Linked TPD policy was developed in response to the need arising to have a policy that covers both situations.

A Super-linked Policy allows you to split your TPD insurance into two components.
1. Any occupation portion would sit inside of super; and
2. Own occupation portion would sit outside of super.
If you were to make a claim, you would first be assessed under the any occupation definition. If you qualify under this definition, then the benefit amount would be paid into your superfund then to the person insured.

If you don’t qualify for the benefit payment under the any occupation definition, then the insurer will next assess you under the own occupation definition which is held in your personal name. If you then qualify under the own occupation, you will then be paid the benefit directly rather than it having to go through super.

If you are unsure about the levels of cover you require or feel you need to change your level of cover to be adequately protected, please get in contact with us and we will run a full insurance needs analysis for you.