Misunderstanding of insurance policies is rampant among consumers who don’t see financial advisers, and it’s not much better among those who do. That’s the alarming discovery made by Asteron Life when the company recently surveyed 1,500 people about what they know and don’t know about the suite of life insurance policies on the market.
According to Asteron Life, many consumers don’t have a correct grasp of what insurance actually covers and this leads them to mistrust the process. The wealth of insurance choices available and the differing levels of cover each provides can leave people in a daze about what type of insurance they need. Clearly ongoing education is vital if consumers are to fully comprehend the value and benefits of what they are paying for. The relationship between consumer and financial adviser is central to this process, both at the beginning and as life stages progress and needs change.
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Here are some common misconceptions about Income Protection Insurance, according to Asteron Life’s survey results.
TRUE OR FALSE?
- Income Protection (IP) pays out 100% of my income when I make a claim – FALSE.
Only 62% of those surveyed knew that IP insurance doesn’t cover every cent of your salary if you make a claim. Income Protection is designed to help you get back on your feet if you can’t work due to sickness or injury. It provides a monthly payment of generally 75% of your regular taxable income. IP insurance is not designed to place you in a better financial position than you were before you made a claim.
A waiting period will apply and there are other factors, such as worker’s compensation payouts, that will influence what you receive from your IP policy. There are also certain activities and conditions that may prevent you from working in your primary occupation for which IP claims are not payable. IP insurance is an important safety net so it pays to know what’s what right from the start. This is where a financial adviser is invaluable and may save you unnecessary heartache down the track.
- TPD insurance includes some income protection – FALSE
If accident or illness robs you of the ability to ever work again in the occupation you are trained for, or in any occupation at all, Total and Permanent Disability (TPD) insurance provides a lump sum payout which you can draw down on over time. This can be used to continue to meet family living expenses and debt obligations plus any added costs associated with your disability such as medical fees, home modifications and ongoing care. TPD insurance does not cover temporary disabilities or trauma conditions where you are eventually able to return to work – these are covered separately by income protection and trauma insurance policies.
- Income Protection pays out a lump sum when I make a claim – FALSE
Income Protection insurance is paid via a monthly benefit to your bank account or credit card. Of those surveyed, 28% believe they will get a lump sum payout if they claim. This is not how it works though. The main reason is that no-one can really know for sure how long the person will be out of work because it is entirely dependent on individual recovery rates and varying circumstances.
Another reason for the monthly payout is that you can claim several times – for the same/related reason or an entirely new one – during the policy period. 72% of those surveyed know this to be true.
- IP gives me a payout if I lose my job – FALSE
If only … the truth is if you lose your job through redundancy or if your unemployment is caused by poor job performance, loss of qualification or licence, seasonal employment or a contract ending, your IP insurance won’t pick up the shortfall. IP exists purely to protect from accident or illness interrupting your ability to work.
However, there are now redundancy cover policies on the market that are optional extras to IP. These may, for example, offer cover for 75% of your income up to $4,000 a month for a maximum of three months while you are involuntarily unemployed. If you are in a position to do so, you could bypass this insurance by choosing to put away three months’ worth of expenses into a savings account. That would equal the payout period you would get with redundancy cover and you wouldn’t be paying out premiums. Most employees being made redundant also get some sort of payout as well and this may help.
Over half of those surveyed by Asteron Life are going to be very disappointed if they expect their Income Protection to cover them should they suddenly lose their jobs!
- The government’s National Disability Insurance Scheme will include some protection for those who make a claim – FALSE
The much-touted NDIS or National Disability Insurance Scheme which is now is the process of being set up and rolled out nationwide by 2019/2020, supports people with a permanent and significant disability that affects their ability to take part in everyday activities. NDIS is intended to provide disability support such as therapies, equipment, home modifications, mobility equipment, taking part in community activities or assistance with employment. The scheme will also funnel eligible people, their family and carers into existing support services that will help with their particular requirements. But one important thing the NDIS is not is, despite its name, an insurance scheme. It does not replace a portion of an individual’s income, it does not pay a lump sum benefit on occupational disablement or upon diagnosis of a specified medical event, nor does it pay out upon death.
So why do people think it will? 32% of those surveyed by Asteron Life are under the impression the NDIS will rush to the rescue should something happen to them. The confusion arises over usage of the words “insurance scheme”. The term ‘insurance’ is defined as “an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium”. The NDIS is solely funded from tax revenue and does not pay any form of compensation to the eligible person. It is not a replacement for insurance policies for anyone. Don’t get caught out with this one!