Five tips on tailoring life insurance to fit

Accountants who understand risk know that made-to-measure cover underpins all meaningful financial plans.

Along with a home and retirement savings, life insurance is foundational to a client’s financial future. It provides invaluable protection in the event that illness, injury or worse leaves the client unable to earn an income, temporarily or permanently.

Given its central role in supporting these key financial and life goals, it is vital to ensure as much certainty as possible when purchasing life insurance. In the event of a claim, you need to know your life insurance will be there, doing the job you need it to do.

Most workers, especially over the age of 25, are likely to have some sort of basic life insurance already in place through their superannuation. Sometimes called group insurance, or group life insurance, this cover can act as an invaluable safety net. However, the protection can often be relatively rudimentary, offering far less certainty than the insured probably wants and needs.

Here are five key areas to focus on when choosing, understanding, and achieving greater certainty with life insurance coverage.

1. Right cover

One of the most fundamental aspects to achieving certainty in life insurance is knowing that the insured has the right type of cover, for the right type of circumstances.

In terms of cover types, the group cover you may have by default through a super fund probably covers the insured in the event of death, and in the event that person is disabled to the extent he or she is unable to work ever again (this is called TPD, total and permanent disablement cover).

Some – but not all – super funds also offer group income protection cover, which ensures a member’s salary continues in the event of their being temporarily unable to work due to disability.

Statistically, claims for income protection are far more likely to happen than death and TPD claims, and to the extent that we all rely on our income to maintain our lifestyle and meet our obligations, this type of cover is arguably the most important. If there is one area we all need certainty, it’s with our income, so it’s worth checking for this type of cover.

There is another type of life insurance, frequently claimed against, that is not offered through any superannuation fund: trauma or critical illness cover. This pays a lump sum in the event you suffer serious health traumas like cancer or a heart attack. These types of conditions are accompanied by hospital stays, lengthy recuperation and large out-of-pocket expenses, which makes trauma cover so valuable and popular. (But remember, the only way to get this cover is through a separate policy, which a financial adviser can help you with).

2. Right amount

Having the right amount of cover, tailored to your own circumstances, is just as crucial as having the right type of cover.

Typically, the amount of group cover given by default to super fund members is based on a one-size-fits-all approach, either as a fixed amount or multiple of salary. Whichever way it is calculated, it has not been tailored to an individual’s circumstances and doesn’t consider mortgage and debts, family situation and overall financial goals and needs.

In all likelihood, it well be less than is needed.

If, at claim time, the benefits paid aren’t sufficient to do the job intended – such as replace the insured’s income, cover their debts or provide for their children – then the consequences could be financial devastation.

Getting the right amount of cover, and ensuring that amount changes regularly as the circumstances change, is crucial.

3. Avoid unexpected exclusions

Life insurance is about risks. Your likelihood of claiming is determined by many factors, including (but not limited to) your occupation, age, lifestyle and state of health.

The most common way to accurately assess this is through a comprehensive analysis of the insured’s circumstances, usually done via a health questionnaire (a process called underwriting).

However, some types of life insurance, including group cover through superannuation and even some online direct policies, look to circumvent this process and may not ask any questions at all.

While this is obviously convenient at the time, it often comes at a price. In the absence of detailed information about the insured, insurers will have little choice but to exclude or limit the extent of coverage that person would have in certain circumstances. These excluded circumstances might include claims relating to mental health or for incidents that happen outside of work, perhaps through sport and leisure activities, or if it is determined some of health conditions were pre-existing. In the case of a claim, the uncertainty of whether one is actually covered adds to what is already a stressful time.

The best way to achieve more comprehensive coverage and more certainty about the limitations on cover is via a properly assessed (underwritten) policy, in conjunction with a qualified adviser who can explain the terms of the policy in detail.

4. Look for quality, comprehensive cover

As well as issues relating to cover types and amounts, group super cover – and some direct cover – is also far more limited in terms of its features and benefits. Sometimes this is because of the way the cover is designed, other times it is due to legal restrictions on when super funds can cover an individual.

A common example is unemployment. Claims on cover through super cannot be paid if the claimant is unemployed at the time of claim, regardless of how long he or she has been working and paying premiums prior to that point. This unfortunate scenario could happen to anyone, and the unemployment could even be linked to the underlying condition that causes the claim. It means the insured could be left uncovered at the time they need it most.

Group contracts are generally in super and hence all have this limitation. The best way to close this gap is through a non-super individual (or retail) policy.

Similarly, through super, you are only be eligible to claim for total and permanent disablement if you are unable to do any job for which you have suitable skills, training, or experience. Whereas under a personal policy, a person can be classed as disabled if he or she can’t perform their own – actual current – occupation.

This lack of certainty about whether – instead of being eligible for claim – one can be forced to work in a different job simply because one is vaguely suited to it, is a showstopper for many people.

5. Get expert advice

Since life is full of uncertainty, and life insurance is becoming increasingly complex, what can be done?

Control what you can control. While group cover performs a valuable role, it is not tailored to an individual’s own circumstances. The best way to protect what matters most is entrusting a qualified adviser to create and maintain a tailored insurance plan that is fully underwritten and specifically designed with the individual and their family’s financial security needs in mind. The adviser can also help review this cover regularly to ensure it remains appropriate as the insured person’s circumstances change.

Matthew Pilcher is director of proposition at PPS Mutual.