By Andrew Clark
Understandably, plenty of people find the complexities of insurance contracts a bit confusing if not a little daunting, So here's a quick overview on the inner workings of insurance policies - and an understanding of a few of the more common insurance policies available for various needs.
The Insurance Policy
An insurance policy is the legal contract used to determine the relationship between an insurer (the insurance company) and an insured (the person or persona taking out the insurance) and is administered in accordance with the prevailing state and federal regulations as well as those regulations imposed by statutory industry bodies.
Insurance policies in the consumer market will fall under the categories of either Life Insurance, Health Insurance or General Insurance.
Basically, under an insurance policy, the insurance company is committing to make restitution in the event that you experience a loss of some description.
This is known as a "transfer of risk" because, in the absence of the insurance cover, you carry the risk - i.e. you would need to bear the cost of loss ... so you are effectively transferring the risk to the insurance company.
The insurance company uses it's own experience and external statistical information in conjunction with the information that you provide when applying for the insurance in order to estimate the size of the risk that they are taking.
The company then calculates it's exposure to the risk based on the estimated claim payouts that it would expect in relation to all policies of a similar nature in order to calculate the premium that you would be expected to pay.
Life Insurance Policies
Policies that fall under the Life Insurance category include ...
Term life insurance pays a benefit to a policy owner on the event of death of the insured person.
If the insured person and the policy owner are one and the same then the claim benefit becomes an asset of the deceased to be distributed along with the other assets in the deceased's estate.
Premiums for this type of cover are determined by the age of the applicant, the term for which the cover is required and may be influenced by the health, occupation, pastimes and smoking status of the insured.
Typically these policies are purchased for a term of one year, after which they continue to be guaranteed renewable by the insurer for each year up to a certain age (e.g. to age 65,70, 75 or 80) and the premium is adjusted with age. It is also possible to purchase Term Life Insurance for a longer term, (e.g. in 5-year or 10-year blocks - or all the way to age 65) with a guarantee that the premium won't escalate for that amount of time.
Term Life Insurance polices do not have a cash-in value, although some policies will agree to make a payment before the insured person has died if they are deemed to be terminally ill with a very limited survival expectation.
Term life insurance policies can often be extended as a 'package' to include Total Permanent Disablement, Trauma Cover and Income Protection Insurance.
- Whole of Life and Endowment Insurance.
These policies are a considerably less popular means of buying life insurance in Australia and are not widely available in the market.
They incorporate a combination of insurance and investment/savings components, the complexity of which is probably a large part of the reason that they are rarely sold here.
Annuities are a bit like reverse life insurance policies because, instead of paying a regular payment amount in order to receive a lump sum payment at the end, with Annuities you pay a lump sum up front in order to receive an ongoing regular income.
Unlike a regular investment, Annuities carry a risk for the Insurance Company. Annuities can be indexed (e.g. monthly payments indexed to CPI payments), guaranteed (irrespective of market fluctuations), for a fixed term (after which the monthly payments stop), lifetime annuities (where payments continue for the life of the insured, however long or short that may be) and they may or may not return a residual part of the initial payment to the insured at the end of the term.
Annuities are often used as a retirement income vehicle by self-funded retirees, or by a surviving spouse reinvesting a life insurance payout in exchange for a guaranteed income.
- Income Protection Insurance
Once popular only with the self-employed, Income protection insurance is now widely accepted as one of the most important personal insurances that an individual can buy.
An income protection insurance policy indemnifies you against the loss of your most important asset (i.e. your ability to earn income) and a good policy will continue to provide a monthly benefit for your entire working life should you be disabled for that long.
Not unlike a term life insurance policy, income protection insurance premiums are usually steeped with age and the policy should be guaranteed renewable and non-cancelable by the insurer, irrespective of changes in your circumstances.
Policies include cover for both injury and illness-related disabilities and will usually offer options as to the benefit waiting period (i.e. policy excess) and the benefit payment period (the maximum time that the insurer will continue to pay in the event of a long-term claim).
Premiums for this type of insurance are tax-deductible in most situations.
Trauma Cover, or Critical Illness Insurance, provides a lump sum payout in the event of the insured person being diagnosed with one of a number of defined illnesses as specified in the policy document.
Whilst the list of illnesses covered by the policy may be extensive, the majority of claims are made for cancer, heart attack and stroke.
Benefits under a Trauma Insurance policy are paid on diagnosis of a condition that meets the definition of the illness as prescribed in the policy.
A primary motivation behind purchasing Trauma Insurance is to allow for lifestyle changes when the insured may not necessarily qualify for income protection benefits for more than a short period and is not necessarily terminally ill.
- Total Permanent Disablement Insurance.
TPD insurance is not normally purchased as a stand-alone policy but, rather, as an adjunct to Term Life or, to a lesser extent, Income Protection insurance.
It may also be an automatic or optional inclusion in some Trauma Insurance policies.
To qualify for a payment under TPD, you would normally need to have been disabled for a minimum of 6 months and then, in the opinion of a medical examiner, unlikely to ever return to toe workforce.
TPD policies can fall into the broad categories of 'own occupation' or 'any occupation'.
A policy that defines the disablement as being unable to perform 'any occupation' is less likely to pay a claim than the policy that uses an 'own occupation' definition.
Health Insurance Policies
The public health system affords a basic level of free and subsidised health care to all Australians through a combination of a health care levy and safety net provisions for low or non-income earners.
Additionally, Private Health Insurance is available to fund additional care such as cover for private hospital, specialist consultations, dental, optical and other ancillary services.
The level of benefits, waiting periods and other terms and conditions can vary substantially for singles, couples and families from one company to the next.
Policies under the general insurance category include;
- Homeowners or Householders Insurance.
These policies typically insure the building of a private dwelling including the fixtures and fittings and/or the contents of the dwelling (some of which may also be covered whilst outside the dwelling in some situations).
There are 2 fundamentally different types of household insurance;
- accidental loss or damage policies cover any type of loss that is not specifically excluded
- defined events policies cover only losses or damage that arise from a list of specified events.
- Motor Vehicle Insurance.
These policies usually cover cars, trucks or other vehicles and may be extended to include caravans or trailers,etc.
- comprehensive vehicle insurance refers to a policy that includes loss or damage to your own vehicle in addition to any damage that your vehicle may cause to the property of others in the event of an accident.
- third party property vehicle insurance is a more restricted cover that excludes any loss or damage to your own vehicle, whilst still indemnifying you against vehicle or other property damage claims from third parties.
- third party property, fire and theft insurance policies are the same as the third party property policies but are extended to include damage resulting from fire and theft of your own vehicle.
- Public Liability Insurance.
This type of insurance cover protects you against claims for damages that you may cause to others as a result of your negligence.
These claims may be for property damage, personal injury, or a combination of both.
Public Liability Insurance is usually an automatic inclusion in a household insurance policy.
However those policies generally offer only a limited liability and will not, for example,cover property damage or personal injuries exclude coverage for any liability that arise in relation to vehicle nor in relation to business activities.
These are risks to be insured under a separate Public Liability Insurance policy.
It is also worthy of note that there are some limitations on the amounts that may be claimed against you for personal injuries as determined by State-based legislation.
- Professional Indemnity Insurance.
Otherwise known as P.I. Insurance, Professional Indemnity Insurance is somewhat similar to Public Liability other than it is designed to cover losses that arise from professional negligence.
Incorrect or insufficient advice would be examples of risks that are covered by Professional Indemnity Insurance.
These policies are, not surprisingly, purchased by people engaged in professions such as doctors, dentists, lawyers, financial advisers, architects, engineers, etc
- Personal Accident Insurance.
Not to be confused with the more comprehensive 'non-cancelable' and 'guaranteed renewable' income protection insurance policies that are included in the life insurance category,
Personal Accident Insurance policies provide a more limited form of cover in the event of your disablement as a result of an accident.
These policies are typically purchased by people who are unable to qualify for a full income protection insurance due to occupational or health classification.
Personal Accident Insurance usually offers an income for a period of up to 52 or 104 weeks maximum in the event of disablement through injury only, and may optionally include additional lump sum payouts prescribed the event of a total permanent disability as well as total loss of limbs, sight, etc.
Travel Insurance. A Travel Insurance Policy is a composite coverage that provides protection for the domestic and overseas traveller. Travel insurance can be purchased either as an individual, as a couple, a family or as a group. Benefits of a Travel Insurance may include losses as a result of cancellation of fares and accommodation, hospital and medical expenses, loss of baggage and Public Liability Insurance. When purchasing international travel insurance in particular, it is a good idea to find out whether the insurance company you choose has representation in the country/is that you plan to visit.ce.
Brokers and Financial Planners
Before committing to any form of insurance policy, it is highly recommended that you seek the advice of a licensed insurance professional (a.k.a. 'broker') - and preferably not one contracted to a single insurance company.
All brokers must be either be the holder of a Financial Services License - or be a properly appointed authorised representative of a license holder..
Licensing and registration is managed by ASIC (the Australian Securities Insurance Commission) to ensure that minimum requirements are met an the areas of;
- education and training
- professional conduct
- complaints handling
- professional indemnity insurance