Why have insurance?
Life is uncertain and insurance aims to reduce financial stress when things go wrong. By taking out an insurance policy the individual is transferring their financial risks to the insurer for a fee known as a premium. If the individual does not have insurance, or has insufficient insurance, they will bear the risk of meeting financial costs.
Types of insurance
There are many different types of insurance options available to Australians. Some common types of insurance obtained by individuals are listed below:
- home and contents insurance
- travel insurance
- car insurance
- health insurance
- life cover
- terminal medical condition
- total and permanent disability cover
- income protection
- trauma cover
This list is by no means exhaustive and further information on types of general insurance can be obtained from the Insurance Council of Australia’s website [insurancecouncil.com.au].
Each type of insurance covers a different financial risk that the individual might be exposed to. The decision regarding whether insurance is required to cover these different types of risks should be carefully considered based on the individual’s circumstances.
Choosing an insurance policy
There is no standard insurance policy for each financial risk. The terms and conditions set out in the product disclosure statement describe the scenarios under which the policy holder will or won’t receive a benefit, and the form of the benefit paid. For any particular type of insurance policy terms and conditions will differ between insurers and also within insurers. An insurer may offer different types of policies for the same risk (e.g. health insurers offer different levels of hospital and extras cover) to suit different types of individuals. The scenarios where the policyholder will receive a benefit will differ under each policy.
The premium paid for an insurance policy will vary based on a number of different factors. The market for certain types of insurance can be quite competitive and it is worth shopping around and talking to the available insurers to get the best policy and premium for the individual’s needs. In essence, the premium will be higher if a policy is chosen that pays out benefits under more circumstances than another policy, or if the individual presents a high risk to the insurer (e.g. if the policyholder is a young driver with a high performance car their car insurance policy is likely to be more expensive than a middle aged driver with a standard car).
When applying for insurance the applicant may be asked to provide specific personal details, such as medical history, to the insurer. This information is used to determine the likelihood of making a claim and will determine the premium charged. This process is called underwriting. The applicant has a ‘duty of disclosure’ to be honest in the information provided to the insurer. If incorrect or misleading information is provided then there is a risk that a future claim may be denied.
Prior to purchasing insurance cover a ‘product disclosure statement’ will be provided to the individual. When reading the terms and conditions of an insurance policy it is important to check for any exclusions. Exclusions are specific scenarios which will not be covered under the policy. They are scenarios where benefits will not be paid out.
When selecting a general insurance policy the applicant may be required to select a level of ‘excess’. An excess is an amount of money the policy holder is liable to pay when making a claim. Having a higher excess normally means a cheaper premium as from the insurers point of view this reduces the number of small claims made. For example, if an individual has a $200 excess on their home and contents insurance they would not make a claim for a broken toaster because the cost of a new toaster is generally less than $200.
Requirements to review your insurance
Most general insurance policies are reviewed annually and the policy holder will be required to ‘renew’ the policy each year. It is important to ensure that the existing policy is either renewed or a new policy is sourced prior to the expiration of the current policy to ensure there is not a period of having no insurance.
Similarly, it is important to review all insurance requirements whenever circumstances change. Some policies have waiting periods which vary for different events covered by the policy. A waiting period is a length of time from policy commencement in which the policyholder cannot make a claim. For example, if an individual was looking to have a baby most health insurance policies will have a waiting period on pregnancy services, therefore if the waiting period is nine months the individual would need to have the policy in place at least nine months prior to getting pregnant so that those services will be available when they are needed.
Insurance is obtained by individuals either through an insurance broker or financial adviser or directly through the insurance provider. Many insurers now have online application forms and there is a wealth of information available to consumers online to assist with their decision making.
In addition superannuation funds in Australia generally offer three different types of insurance which cover the financial risks associated with death, permanent disability and temporary disability or illness. Insurance through superannuation is discussed in Part II of our understanding insurance articles.
Obtaining appropriate levels of insurance for each individual’s circumstances is important to ensure they are adequately covered for financial loss should unexpected events occur.
If an individual is unsure about the levels of insurance required they might make arrangements to see a qualified financial adviser or insurance broker. Insurance should be reviewed regularly. For example, when individual’s get married, they might wish to update their health insurance to ensure pregnancy services are covered. Similarly, as an individual’s salary increases, or personal debt levels change, they may require different levels of insurance to cover changing or new financial risks.
In particular, a self-managed superannuation fund (SMSF) trustee is required to consider the insurance requirements of members as part of the regular review of its investment strategy, and consider whether it is appropriate to hold any insurance in the superannuation fund. For more information regarding insurance options through your superannuation please read our article ‘Insuring through super’.