The five least understood areas of personal insurance cover

Nearly every new client asks us to also review the other policies they have in place through their bank or with another adviser. In doing so, we come across the same issues time and time again. We provide some clarity around five of the least understood areas of personal insurance.

In this blog post we put the spotlight on five of the least understood areas of personal insurance. For more practical tips, including how to reduce your premiums, download our guide. 

1. There is more to insurance than just medical and life cover

While these are probably the most well known, there are a number of other options you should be considering.

• Trauma. This is where we see the most claims. Trauma cover pays you a lump sum if you suffer a predetermined health condition and survive for 14 days. Trauma covers a wide range of events including cancer, heart attack and stroke.

• Income or Mortgage Protection pays you a monthly benefit if you’re unable to work due to sickness or injury.  If you have the right cover in place, this benefit will pay right through to retirement age if you find yourself in the position where you can’t return to work.
  
  
• Total & Permanent Disablement (TPD) pays out a single lump sum if you experience an illness or injury that stops you from working ever again.  Financially this is the worst thing that could happen to you and your family, so you want to make sure you have the right cover in place.

2. The structure of trauma and TPD cover

With these two benefits there are two ways your cover can be structured:

• Accelerated. Under an accelerated benefit structure, your life insurance benefit will decrease by the amount paid under a claim on either your Trauma or TPD benefits.
  
  
• Stand alone. Under a stand alone benefit, when a claim is paid the payment does not affect any other benefits.

We typically recommend that clients take out a stand alone benefit so they can retain their life insurance if they make a claim. However, as long as you fully understand how both structures work, then you may opt for an accelerated structure.

3. Do you have comprehensive trauma cover?

This is an important point, especially if you have an older bank insurance policy.

Some trauma policies only cover you for a very small list of conditions. With some of the older bank trauma policies, only 12 to 14 conditions are covered. Under a full comprehensive trauma policy more than 40 conditions are covered.

What would happen if you suffered a major health condition that was not on the list?

While these less comprehensive policies usually cover the big three (cancer, heart attack and stroke), what would happen if you suffered a major health condition that was not on the list?  

When comparing these products it is interesting to note that the premium for more comprehensive trauma cover is usually not much more expensive.

4. Do you have the right income protection cover? How long would it pay for if you claimed?

There are a number of different ways your income protection cover can be structured. The two main ones are:

• Agreed value cover. This is based on a percentage of your income and any claims proceeds are tax paid.

The advantage of an agreed value policy is that it is financially underwritten and the benefit amount is agreed on at the time of application, therefore providing more certainty at claim time.

• Indemnity cover. This is based on 75 percent of your income and any claims received are before tax.

With an indemnity policy you will be required to prove your income at claim time.

You’ll also need to consider how long your benefit pays for.  You can choose a payment term of two years, five years or through to age 65 or 70.

Most bank policies will only pay the income protection benefit for two years, which is ‘okay’ if you suffer a condition that allows you to return to work. But what happens if you could never go back to work ever again?

5. Who owns your policy?

Whomever owns your policy is the person (or people), that the proceeds go to in the event of a claim.

A lot of the time personal insurance cover is owned individually by the person insured. So if you were to die, the claims proceeds for your policy would go to your estate to be distributed as per your will (if you have one), and this will likely get held up by probate. An option could be for your partner to own your policy (or you can own it jointly), so if you die the claims proceeds are paid directly to the surviving partner.

Some of our clients have their policies owned by their trust, others owned by their parents. It's completely up to you how the ownership is structured, but make sure you fully understand the claim process.

Please contact us if you have any concerns or questions about your policies. Alternatively, for more great insurance life hacks, download our ebook.