Covering all bases

By Nila Sweeney

These are turbulent times for Australians trying to make ends meet and pay a mortgage in a slowing economy. As the financial outlook starts to decline, the importance of having insurance as a back-up becomes even more important. Daniela Aroche examines what to look for and what to look out for when you take out insurance

With the unemployment rate set to rise this year, industry experts are urging homeowners to get their finances in order before it’s too late.
And while financial problems can’t be fixed with the click of a finger, you can invest in proper insurance to make certain you won’t be left in the lurch if times get tough.
“Everyone who is eligible should take some form of insurance to protect their assets, their life and their income,” says Merv Christensen of SGE Credit Union. “And while not everyone does this, failing to do so can lead to hardships in the near and long term.”

The reason for this is simple. If you were unexpectedly unable to earn an income for an extended period of time, it could affect you and your family deeply – not only financially but emotionally
as well.

Additionally, if you were uninsured or under insured, you could need to draw down on your accumulated assets well ahead of time. Utilising these assets could seriously eat into your investment or retirement plan and cause repercussions in the future.

Surprisingly, John O’Shaughnessy from the Investment and Financial Services Association (IFSA) says that research commissioned by IFSA has shown that this scenario is still something many Australians are willing to risk.
“Income protection insurance is affordable and tax deductible for most people, [yet] research done for IFSA has shown that only 4% of families with dependent children have the level of insurance cover that they need,” says O’Shaughnessy.

The same is true of home and contents insurance.
A recent survey collaboration by Australian insurer Suncorp and Reed Construction Data revealed that up to 70% of Australian homes are under insured.
This is an alarming figure, especially when you consider that the family home is not only the primary place of residence for most individuals, but their largest asset as well.

As Australians can experience natural dangers like bush fires, cyclones and floods, residents without insurance on their homes and contents need to consider whether losing their home and possessions is a risk they would be willing to take.
Which product?
The first thing to do if you’re considering some sort of insurance is to investigate what’s out there and, just as importantly, what you need.
There are many types of insurance
and countless providers on the market, but there are two specific forms of insurance that are particularly relevant to home owners.

Income protection insurance What is it?
Income protection is insurance that pays  you a monthly benefit if you are unable to work due to a disabling injury. In essence, it becomes your salary – and, as anyone with a mortgage knows, a steady salary is essential to ensure you don’t default on your loan repayments.
However, Wally Ripper of Insurance Watch says that, while the premiums for income protection insurance are both affordable and tax deductible, a worrying
number of Australians still don’t think to invest in this kind of security.

“While most of us think to insure our properties against theft or loss, an even bigger threat is a sickness or injury which leaves you unable to earn an income and continue to support the mortgage payments. Dealing with a serious illness is hard enough without having to deal with potentially losing the family home or having to liquidate assets intended for retirement savings.”

While the monthly payment is usually restricted to around 75% of your average yearly salary or a maximum amount* set by the insurance company, the
benefits you receive can help you pay your mortgage and any other bills you may have.

*The maximum amount set by the insurance company is usually around $5,000 a month

Who should have it?
Generally, everyone who works 30 or more hours a week can and should get some type of income protection. Anyone with a mortgage to pay and a family to support should seriously consider this kind of insurance – especially given the current market conditions where finances for most families are already
stretched due to interest rates, the rising cost of petrol and overall living costs at an all-time high.

How do you get it?
Applying for income protection insurance is fairly straightforward. You simply visit your chosen insurer,
request an application form and the insurance company will take it from there.

Once you have completed your application form, the insurer will read it through and complete their own
assessment on the information you provide and decide whether to accept the risk and on what terms.

Because there is a wide variety of insurance companies that offer cover and many different types of income
protection insurance policies, it’s important to research the different options offered by the company and compare this against what you will need from the cover.
Picking the right insurance to cover your needs is vital, since there could be dire consequences later if you miss any of the terms and conditions during the application process. This is where an insurance broker might come in to make sure you choose the policy that best suits
your personal situation.**

When filling out the application form, it’s also important to answer all of the questions as fully and completely
as possible and to ask the insurance company (or your broker if you’re using one) to clarify any parts of the policy, application form or product disclosure statement you don’t understand.

Depending on your age, the type of cover you’re after, the amount you’re seeking and your medical history, you may also be required to undergo a medical examination, blood test or ECG as part of the underwriting process.

**The National Insurance Brokers Association (NIBA) is an industryassociation representing brokers, agents and underwriting agencies operating in the life
and general insurance industries. It can recommend reliable insurance brokers that are part of their organization (

The basics

The fee you pay per year in order to secure your income protection should you ever become disabled is referred to as a premium. The amount you have to pay usually increases every year with inflation rates and also depends on age – on the assumption that the older a customer is, the higher the risk of disability will be in regards to them.

The minimum premium for most companies is around $220 if you pay your premiums monthly, and $200
if you pay the insurance company an
annual lump sum. It’s important that you carefully read what is included in your premium prices, and how and when the company can increase your premiums. Factors that will affect your premium are your occupation, age, gender, health, smoking status, and the waiting and benefit periods you choose.
Another important point to consider when comparing premium rates is whether or not the company you are
researching waives your premiums during the time you are being paid a benefit.

Waiting times
The waiting period refers to the lengthof time between when you become disabled and when your payments begin.

Generally the choices are 14 days, 30 days, 60 days, 90 days, one year and two years.

Your choice should be made carefully and needs to consider the following:
• Will your company offer any support if you are disabled and for how long this will continue?
• How inclusive will this support be?
• Will it be enough to pay all of your bills?

Christensen of SGE Credit Union advises that company benefits should also be kept in mind when choosing a waiting period.
“Customers should be encouraged to look at their current work benefits such as annual leave, sick leave, long leave and any work-related superannuation benefit
for a similar policy that is now often built into their employment conditions before selecting their waiting period,” he says.

These extra bundles of cash could be used as income if you were ever unable to work, which means you can extend your waiting period and pay less on
your premium.
Income protection will deduct any extra income you are receiving from superannuation policies so you will only get 75% of your pre-disability income in total. If you will receive nearly 75% of your salary from your company for a year or two, you should probably choose a longer waiting period. This will cut down on your premium rates as well.
Also, remember to ask your employer if and when you are allowed to change your waiting period.

Benefit period
The benefit period is the length of time after your disability that you will be paid the amount you and your insurance company have agreed upon. You can
choose to be paid benefits from as little as one or two years to as many years as it takes for you to reach the age of 65. The general rule is that the shorter the benefit period, the lower the premium.

Extra options
Every company has options you can add to your benefit. Each company usually provides different options, and there are a few choices that almost all
companies offer. However, although they might come under the same name, it’s important to remember that the elements of the options may vary slightly depending on the different company. Be sure to read the fine print and find the options that are right for you.

• Indexation option: With this option, not only will your premiums increase each year with inflation, but so will
the size of your benefit. However, your benefit will only increase while you are paying premiums. Once you are being paid the actual benefit, the benefit will no longer increase with inflation.

• Partial disability benefit: One of the most common options, the partial disability benefit, provides you with
cover if you are not totally disabled. This will apply if you are unable to work the same number of hours as before the injury, or if you cannot work in the same job as before (and have your salary reduced as a result). But it’s important to investigate the insurance providers’ definition of ‘partially disabled’. Restrictions are greater with this option. Remember, it’s always important to check the details before choosing the
partial disability benefit.

• Rehabilitation expenses benefit: The insurance company may also provide extra money for rehabilitation costs while you are receiving total or partial disability payments. This extra money will usually last for a shorter time than your benefit period. Health insurance companies often offer rehabilitation money as well, so make sure the two benefits don’t overlap.

• Exclusions: Exclusions are the clauses that state when the insurance company can refuse to pay your claim,
so it’s extremely important to pay attention to these conditions when choosing an insurance company for
income protection.
Some companies can be very tricky when writing these exclusions, so make sure that you understand them fully
before signing up for insurance. Read past the exclusions section of the policy, making sure to check the definitions of total disability and partial disability,
and any other definition included in the information given.
If your condition doesn’t match the definitions given, the company can refuse to pay you benefits.

Providers and funding
All major life insurance companies offer income protection policies and many lenders, including banks, will also offer this product to borrowers when they sign
up for a loan.

Superannuation funds also offer income protection or salary continuance policies, but these products may not come with all the additional features of outside super policies – so it’s important to research this option carefully.
Policies from super funds can also be attractive because of the cheaper prices offered, and using superannuation funds to pay the premium can help ease cash flow pressures.
But, according to Ripper, the bottom line difference is not all that significant.
“Income protection policies are already fully tax deductible for individuals, so there’s no tax advantage to holding a policy within a super fund rather than
personally,” he says.
The most common way to pay premiums is by direct debit or BPAY in regular weekly, monthly, half yearly or yearly payments. You can save on this type of insurance by:
• comparing premiums online across all insurers
• selecting the longest waiting period your resources will allow
• taking advantage of multi-policy and multi-life discounts offered by insurers
Often companies will also give discounts or extra benefits to clients who have taken out more than one
type of insurance with them.

What to look out for
As previously mentioned, exclusions should be carefully looked at when choosing an income protection plan. Some companies limit the type of disability you can be covered for, and also provide very specific conditions about where that disability can occur.
When and why a company can cancel your policy should also be looked at, as well as ensuring that youwill be covered if you have to travel frequently in your job.
Indemnity contracts should also be considered carefully. These are contracts that require you to provide evidence of your income for the 12 months before the claim. Indemnity contracts also dictate that the insurer can reduce the amount of monthly benefit they pay you if your income fell since you took out your policy.

“Many cheaper income protection policies are indemnity contracts, but the more expensive Agreed Value policies give you greater certainty thatb you’ll be paid the monthly benefit you are insured for in the event of a claim even if your income fluctuates, you take unpaid leave or you become self employed in the future,” Ripper says. “Indemnity contracts remain a
cheaper option for salaried people who expect their income to remain stable or increase over time.”

Checking that your policy can’t be cancelled due to failing health or age is also important, and be sure you
read all of the offset clauses on why a company can reduce the benefits you are paid as well.

Finally, it’s important to read the definitions and ask the company about anything you don’t fully understand.