Sadly, life insurance is the ugly stepsister of the financial world. Talking about investments is fun - who made what, where. Talking about superannuation is kinda fun - in the mine-is-way-better-than-yours way.

But life insurance? Who wants to talk about the money they might get (if those damned insurance companies ever pay out)? Nothing will ever happen to me - I don’t need insurance.

If only.

So, who is this book for? Simple - it’s you. Of course, by saying that I’m assuming that you:

• know something about life insurance
• want to know more about it
• want to find out how you can use it to protect you and your family
• would like insurance’s veil of mystery pulled away
• Who shouldn’t read it? Anybody:
• who thinks they know it all about life insurance (they probably don’t)
• that researches everything to the nth degree before deciding (this won’t be detailed enough for them)
• that actually thinks they’ll never get seriously ill, disabled or even die (it’s a tad arrogant to say ‘that’ll never happen to me’ - I’m just saying...)

I’ll admit, it’s not the most scintillating of topics: the ins and outs of life insurance have been known to send people into a deep, deep sleep.

But I’m also going to assume that you think preparing, financially, for the worst day of your life is important enough to do some research into.

So I present to you this, our guide to Life Insurance. Think of it as an intermediate-level course in life insurance.

As a financial planner, I would dearly love if, after reading this, you were compelled to call Tangram Financial and immediately do business.

But that’s not the intention of this book.

There’s too much confusion, apathy and secrecy out there about life insurance. We want to do our bit to strip all of this away. We believe that nearly every working Australian needs to have some level of life insurance - we see this as part of our contribution to that.

So, we have tried to limit the self-promotion within, but please forgive us if any has snuck through.

Finally, throughout the book, we’ve thrown in a few odds and ends that we thought you’d find useful. So keep an eye out for these info boxes, as they’ve all got useful information in them.

Disclaimer

(This bit’s really important - be sure to read it)

This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.

Before acquiring a financial product a person should obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product.

The material contained in this document is based on information received in good faith from sources within the market, and on our understanding of legislation and Government press releases at the date of publication, which are believed to be reliable and accurate.

Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.

Jordan Vaka, Tangram Financial Pty Ltd are Authorised Representative(s) of Apogee Financial Planning Limited ABN 28 056 426 932, an Australian Financial Services

What Is Life Insurance?

At its core, Life Insurance is pretty simple:

Paying somebody else to provide for you financially in the event of death, disability, serious illness or injury.

Of course, there are layers and layers of detail heaped upon this simple definition, but through it all, that’s what life insurance is - you’re paying an insurance company now, to give you a payout in the future when one of the ‘trigger events’ occurs.

Not all insurance companies are created equal.

Look for one that has: a strong history of paying out claims, a strong financial position, a good range of 'trigger events' and a well-priced offering.

What do we mean by ‘trigger events’? Well, in the contract that you sign with an insurance company, they layout all of the things they will pay out for. This could range from a heart attack to a traffic accident to a serious sports injury. This contract - made up of their Product Disclosure Statement and your individual policy - is where the detail is.

And as with anything, the devil is in the details.

Always, always, always read your insurance contract.

Did you know there are certain types of heart disease insurers will pay for, and others they won’t? The last thing you want is to claim on your policy and for it to be refused.

Be wary of discounted policies.

If an insurer is significantly cheaper than their competitors, it might mean that they’re relaxing their rules to take on more clients.

This could impact how willing they are to pay claims down the track. Life insurance is one of the few times it pays to stick with the herd.

Things You Should Know

First, some definitions. I know, try to contain your excitement. But learning about life insurance without these definitions will make things much more difficult than necessary.

Beneficiaries: Who will receive the benefit of your policy - who gets the money, essentially. Can be you, your estate, your spouse, your children or your super fund.

Benefit: The amount that you’re actually insured for, and what the insurance company pays out when you make a successful claim. ‘My policy has a benefit of $400,000, which will be paid when I die.’

Claim: When you believe that one of your policy’s trigger events has occurred and you apply to the insurance company. If they agree, the benefit on your policy will be paid to you or your beneficiaries.

Duty of Disclosure: The idea of insurance is entirely based upon this legal precedent - that you, as the life insured, must disclose any information that could be reasonably expected to influence an insurance company’s decision to offer you cover. If you don’t, the policy might be voided and you will receive no benefit payment.

Exclusion: Where an underwriter decides that a life insured has specific features that represent higher-than-standard risks, so they specifically exclude them from the policy. Generally a result of a life insureds medical history. ‘Because of the back injury I had a few years ago, my insurer has excluded my back from my policy.’

Life Insured: The person who is insured. Policies have three main parties - the policy owner, the life insured and the beneficiaries. (Oh, and the insurance company - they play their part too!) The policy owner and the life insured do not have to be the same person.

Loading: Where an underwriter decides that a life insured is a higher-than-standard risk, so they ask for a higher premium in return for giving them cover. Normally expressed as a percentage.‘Because of my medical history, my insurance policy had a 100% loading.’

Policy: The contract between the policy owner and the insurance company. Made up of the details in the Product’s Disclosure Statement (PDS), any amendments made to the individual policy and the information disclosed by the life insured.

Policy Owner: The party that actually owns the policy. They can dictate where the benefit is paid. So the policy is ‘theirs’, not the life insureds. It is possible for the policy owner and life insured to be different.

Premium: The cost of the insurance. Can be paid monthly, quarterly, semi-annually or annually. The policy owner is responsible for ensuring it is paid. If the premiums are stopped, the policy will lapse.

Premium, Level: Where the premium for an insurance policy is projected over the entire life of the policy and then averaged back over each year, so the cost does not increase due the life insureds age. CPI and company-wide increases will still apply.

Premium, Stepped: Means that the price of the insurance increases each year as the life insured gets older and the risk of them claiming goes up. This means that insurance is much cheaper the younger somebody is, but when they get older it gets (often extremely) more expensive. Useful for people looking for cheaper insurance now.

Terms of Approval: The terms of the underwriters final decision. Can fall into one of four camps - Approved, Approved with an Exclusion, Approved with a Loading, Declined.

Trigger Events: The ‘triggers’ that will mean a policy owner can claim on their policy. ‘Cancer is a trigger event on my insurance policy, so the insurance company paid out when I was diagnosed.’

Underwriter: The gatekeepers of life insurance. Underwriters use the information provided to decide whether or not they will give you cover. They need to take into account medical, financial and historical factors. To make a qualified decision they need as much information as possible.

What Is TERM LIFE Insurance?

There are four main types of insurance that we lump together as ‘life insurance’.

They each serve a different purpose and cover a different set of risks.

One Type of Cover Isn’t ‘Better’ Than the Others

Think of the four types of insurance as pieces of a puzzle - leave one out and you miss out on the full picture.

What most people call ‘life’ insurance is actually Term Life Insurance. Effectively ‘death’ insurance, these policies pay out when the life insured dies.

Term Life Insurance is an unusual product because it covers something that will happen to every single person - death. Sure, terms and conditions will apply, but if we can be guaranteed of one thing, it’s our mortality. So, nearly every person needs some level of Term Life cover, depending on their situation.

What’s It For?

Term Life is there to reduce the financial impact on your death upon those you leave behind.

Think of the impact if you were you to pass away tomorrow.

• Will your spouse need to keep paying the mortgage?
• Other debts?
• Who will pay for your funeral? How?
• Do you have plans for your children’s education? How will that be paid for?
• If you’re the breadwinner, what will the loss of income mean for your family?
• Do you want to replace some portion of this income so your family can maintain their quality of life?

It’s a difficult exercise, but take the time right now to sit down and write down what will happen if you were to pass away tomorrow.

This is why you need to have Term Life insurance.

What Is DISABILITY Insurance?

Where Term Life cover pays a benefit when you pass away, Total and Permanent Disability insurance only pays a lump sum benefit when you have become totallyand permanently disabled.

Bundle or Unbundle?

Bundling your disability insurance with your Term Life normally gives you a discounted premium. But unless a ‘Continuation’ option is selected, any benefit payout on the disability policy will reduce the Term Life benefit by the same amount.

What’s It For?

TPD cover is designed to help you and your family, financially, should you become disabled.

Research has shown that 1 in 16 people will become so disabled that it will impact on their ability to work.1 This obviously has consequences for their financial situation.

Ask yourself:

• who will pay the mortgage?
• who will pay the medical bills?
• how will you fund the goals your family has, if you were to be disabled?
• who will pay the car/home/contents/health insurance?

How Much Is Enough?

It’s common for the level of TPD cover to be higher than the Life cover. Why?

Sadly, it’s because you’re ‘still around’. You’ll be incurring costs for the remainder of your life - medical care, home renovations, plus eliminating your debt, replacing income and providing for your family.

A Note on Medical Costs

A lot of people (reasonably) think that their private health insurance will meet all of their medical costs.

Sadly, this is not the case.

The range of medical conditions that can lead to a TPD claim means that there is good likelihood of ongoing medical costs that fall outside private health insurance.

If you were given the chance to access a different form of treatment that could work - but private health insurance wouldn’t cover it - wouldn’t you want to have the means to pay for it yourself?

Super Idea?

Like Term Life, TPD cover can be put into your super fund. But there are serious consequences if this is done incorrectly.

Get professional financial advice in this area, because if you get it wrong, you run the risk of having the whole TPD benefit stuck in your super fund.

And it’s no good to you there.

Occupational Ratings

One of the tests used for whether or not somebody is totally and permanently disabled is whether or not they can still work. So one of the key points with TPD insurance is the occupation definition you’re insured under.

There are two main types:

An Any Occupation definition means that because of sickness or injury, you are unable to work in any occupation for which you are suited by training, education or experience.

An Own Occupation definition means that because of sickness or injury, you are unable to work in your own specific occupation.

Effectively, an ‘Any’ occupation means that if there’s any job similar to yours, that you can still perform, you won’t be paid the entire benefit, because there’s a chance you can return to work.

But with an ‘Own’ occupation, you only need to show that you cannot do your actual role to be able to lodge a claim. In essence, the level of disability you need to prove is lower.

Confused? Think of a Surgeon:

If a surgeon were to irreparably injure one of their hands, their days of operating are finished.

Under an ‘Any’ occupation, the insurance company can argue that the surgeon could still teach medicine, and reduce their payout accordingly.

But under an ‘Own’ occupation, all the surgeon must show is that they cannot, as a result of their injury, do the surgical procedures for which they are trained.

What Is TRAUMA Insurance?

The third piece of the life insurance puzzle is Trauma Insurance. Sometimes called ‘Critical Illness’ cover, this form of insurance pays out a lump sum benefit upon the diagnosis of a serious illness.

Which illnesses are covered will be explained in the PDS for each product. Be sure to read them and compare them - or make sure that your adviser has done their homework.

Details, Details, Details

Knowing the details of your insurance policy is important with each of the four forms. But it’s really important when it comes to Trauma cover.

Different insurers will have different definitions for the Big Three - heart attack, stroke and cancer. Look for the broadest definitions you can get on the Big Three.

What’s It For?

Trauma insurance is perhaps the most relevant for younger people, because the statistics are against them, unfortunately.

The most common claims are for the ‘Big Three’ - Cancer, Stroke and Heart Attack.

• 1 in 3 men and 1 in 4 women will be diagnosed with cancer in their lifetime. (Half will live more than 5 years after diagnosis)
• 50,000 Australians have a heart attack each year.
• There is a stroke event in Australia every 12 minutes.

Sure, there’s the chance it won’t happen to you.

But I don’t like those odds.

Peace of Mind Ain’t Cheap

Trauma Insurance is relatively expensive, compared to the other 3 forms of cover.

The biggest things that will influence the price are: your age, smoking status, height/weight, medical history and family history.

The moral of the story? Get it when you’re young and stay in for the longhaul.

Because odds are, you’ll have to claim on it one day.

Trauma insurance, when you get down to it, is there to allow you the chance to take time off work, focus on recovering and spend time with your family.

Thanks to advances in medicine, even over just the last five years, survival rates for the Big Three keep going up. Trauma insurance is there to get you through the worst of it and make sure you can get back to your life as soon as possible.

You’re Covering For Two Now

When thinking about how much cover you need, don’t forget to allow for the possibility of your partner taking time off work to care for you while you recover.

A year away from work can mean a big drop in their income - do you want to provide for this in your Trauma cover?

What Is INCOME PROTECTION Insurance?

And so we move onto the fourth, and last, type of life insurance - Income Protection (IP).

IP insurance is designed to pay you an ongoing income stream equal to 75% of your regular income in the event that cannot work due to illness or injury.

What It’s Not

IP insurance is only for those times when you are unable to work due to health-related reasons. It doesn’t cover redundancy, or unemployment.

It’s there to replace part of your income to give you the chance to get back on your feet, without being financially devastated by being unwell.

Why 75%?

Generally, it’s the most they’re allowed to pay because they want you to have an incentive to return to work.

If you’re getting 100% of your income, why go back to work?

Like Chalk and Cheese…

If the different life insurances were high school kids, IP would be the victim of constant bullying. It is just so different to all of the other types.

• Where term life, TPD and trauma pay lump sums, IP pays a regular income stream.
• Where you (generally) only claim once on the other three, you can claim multiple times on IP.
• There is only really one variable in your control when it comes to pricing (benefit amount) the other types of insurance - IP has at least five.
• Where the other premiums give you no tax benefit, your IP premium can be fully tax deductible.
• Where you shouldn’t be paying tax on the benefit payments on any of the other three, IP is normally fully tax assessable. (Of course, always check with your accountant for the impact on your personal tax situation).

It’s All About the Timing…

Be aware that most IP policies pay benefits monthly, in arrears. So, if you have a 30-day waiting period, expect to get paid up to 60 days after claim.

Who’s it For?

Income Protection insurance is vital for:

Principal Breadwinners

If, as the breadwinner in your household, your income were to stop tomorrow, what would be the consequences? Not only would you be dealing with some serious health issues, you’d also be worrying about how you would pay your bills and provide for your family.

People With a High Level of Debt

According to the statistics, there is a very good chance you fall into this category.

While we can provide for this debt with the other three insurances, Income Protection will help you to maintain the payments now and provide for your other needs.

Single People That Rely On Their Income To Maintain Their Standard of Living

Perhaps the most neglected group when it comes to life insurance, we think that people under 30 really need Income Protection insurance. Unfortunately, health issues can arise and thanks to the combination of high debt, high living costs and the possible loss of potential earnings, their need for IP cover, in particular, is quite acute.

Keep it on the Level

Getting into Life Insurance, and Income Protection, when you’re younger makes sense - especially when you lock in the premiums using a ‘level’ premium structure.

You’re going to have the cover for longer, so you’ll see the long-term savings.

Every year you keep the policy after the ‘break-even’ point, you’re ahead.

Do I NEED Life Insurance?

Perhaps the most common question when it comes to Life Insurance is do I need it? (Followed by how much do I need? and why’s it so damned expensive?)

At Tangram, we believe that nearly every working Australian needs some level of life insurance. We also think that this level will be different for each person.

So, to help you work out if you need life insurance, we have this useful worksheet. (Of course, this isn’t mean to be financial advice, it’s only meant as an illustration of some of the issues you might consider when making a decision about life insurance. Be sure to obtain personal financial advice before making any decision.)

Needs How much debt do you have right now? (A) What is your current level of income? (B) How many years do you have until retirement? (C) Multiply (B) and (C) = D How much do you want put aside for an emergency? (E) SUB-TOTAL: (A + D + E) Means How much do you have in savings right now? (S) How much super do you have? (Su) Do you have income that you would still get even if you couldn’t work? If so, how much? (F) How long would this continue for? (G) Multiply (F) and (G) = (H) Would your work pay you if you couldn’t go in? How long? (I) SUB-TOTAL: (S + Su + H + I) How Much Do I NEED?

This is another really common question.

Unfortunately, we can’t really go into detail here about this, as it’s different for each person and we’re quite wary of stepping over the (legislative) line and giving financial advice.

We really recommend obtaining personal financial advice when it comes to working out how much you need.

How We Do It.

But so you know, for us, the process is:

1. Find out about the client - personal details, financial information, etc.
2. Work out if they need insurance.
3. Work out how much they need - we have specific and detailed calculators for this task.
4. Make our recommendations.
5. Implement the recommendations, with any client amendments.

From what we understand, this is the standard way of operating, so you can be pretty confident when you see an adviser that they’ll provide you with the cover you need.

Legislation, Legalities and Law Suits

Another benefit to seeing an adviser is the security of having a professional provide the advice.

If they do not give you the advice that you need, they could be professionally liable for any shortcomings in the advice.

Getting the Right Advice

When you’re getting advice in this area, make sure:

That you get any advice in writing

Your adviser should provide you with a Statement of Advice, explaining their recommendations and reasons for the advice. It also has to include the fees and commissions payable, plus any relationships that might influence the advice. Be sure to get it in writing.

That they’ve considered ALL of your needs

Make sure that they’ve considered the value of the income you can expect to earn in the future. It is possible to insure for this and to put a dollar value on it. This is neglected sometimes, because it could involve a lot more cover than you want. But as advisers, we have a duty to provide you with the advice you need, not what you want.

That they include more than just your mortgage

As you’ve seen, there is a lot more to life insurance than ‘just your mortgage’. If somebody is only covering your mortgage, find out why. They probably have a good reason, but make sure you agree with it.

Depending on your age, your mortgage might only be 30% of your total insurance need - make sure the other 70% gets the attention it deserves.

That you get some comparison quotes.

While in life insurance, the cheapest normally isn’t the best, there also has to be a good reason for having a policy more expensive than the rest. Standard practice is to have at least two other quotes for you to see where your policy stands compared with the competition, as well as reasons for choosing the one recommended.