Insurance Is Not Created Equal: The IP Review

Overview

When someone comes to me for an insurance review, I am often asked what I look for. The answer is simple, quality that matches their needs.

This article will look at one of the four main personal insurances I review when developing your comprehensive personal insurance plan, Income Protection.

Firstly, what is Income Protection? It is a type of personal insurance that replaces the income lost through your inability to work due to injury or sickness. Income protection usually offers cover for up to 75-80% of your gross wages for a maximum time period, after you have a satisfied a specified waiting period.

Selection Criteria - The List

The quality of an Income Protection insurance policy can be gauged by going through Insurers' Product Disclosure Statements, but the reality is, in between your work/life balance would you set aside time to read and critique a 100+ page insurance document? I do, but it is my job (and I enjoy it!) - BTW congrats if you would!

So, when I am conducting an insurance review I utilise a selection criteria list that helps me to assess an existing Income Protection insurance policy's quality on a standalone basis and if it doesn't tick all the boxes I then go and compare it against the offerings of other Insurers in the market. The selection criteria list comprises of several provisions, for example (to name a few):

1. Ability to Work During the Waiting Period,
2. Offsets,
3. Capability Clauses,
4. Definition of Pre-Disability Earnings, 
5. Definition of Total Disability,
6. Inactive Employment,
7. Exclusions,
8. Guarantee of Renewability,
9. Inactive Employment,
10. Indexation on Claim,
11. Indexation Benefit,
12. Injury and Sickness,
13. Waiting Period Requirements,
14. Superannuation Contributions.

The List - At A Glance

I will not go into detail on each provision that is on the above selection criteria list, however what I would like do is to explore at least two provisions to help explain why an insurance review is importance, namely, it identifies the quality of your existing Income Protection policy and whether it meets your needs.

Offsets

Insurers reserve the right to reduce the Income Protection benefits by amounts received or in some cases receivable from other sources such as sick leave payments, social security payments, total and permanent disability lump sums etc.

Below is a comparison of two Insurers' offerings,

Insurer A (Group Insurance) = Income Protection benefits will be reduced by sick leave payments, amounts payable under legislation such as workers compensation, social security benefits (other than Centrelink payments), or motor accident compensation, other income protection policies, employer super contributions, income earned from personal exertion while disabled.

Versus,

Insurer B (Retail Insurance) = Income Protection benefits may be reduced by workers or motor accident compensation, and payments from existing super funds or another existing insurance policy if not disclosed prior to the issuing of the policy.

Indexation on Claim

An Indexation on Claim benefit protects the "real value" of disability benefits in the event of a long term claim. To put it into perspective, the financial impact of inflation on your weekly grocery bill can be significant over a long period of time. For example, bread (1 loaf), milk (1l), sugar, butter (450g), potatoes (450g) and tea (450g) cost $2.55 in 1979 whereas those same items today would cost $11.31. That is a 343.4% increase over 35 years.

Think about if you needed to claim on your Income Protection at age 30, with the expectation that you will need to use the full benefit period (payable to age 65) to fund your cost of living, but your Income Protection policy did not have Indexation on Claim.

Below is a comparison of two Insurers' offerings,

Insurer A (Group Insurance) = This policy does not provide an Indexation on Claim Benefit.

Versus,

Insurer B (Retail Insurance) = Monthly benefits whilst on claim increase annually in line with the Consumer Price Index and their is no maximum increase.

References

IRESS. Qualititative Analysis: One on One Comparison.

This publication provides an overview or summary only and it shouldn't been considered a comprehensive statement on any matter or relied upon as such. This publication doesn't take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser. You should seek advice from a qualified taxation adviser when making any decisions about taxation matters.