Getting the most out of life
Personal insurance cover should be reviewed regularly to ensure it is still appropriate as the level of personal risk changes with different life stages and events.
It is a good idea to take advice before you replace your existing policy with a new one, just to make sure you won’t be losing a benefit you really wanted to keep.
The FSC provides a form which your adviser may use in discussing with you whether you should replace your existing policy. It is designed with one side for advisers and the other side for policy owners. Advisers are not required by regulation to use this form but many will as it helps with the decision-making process, and may be required by some product providers.
There is also an information brochure Get the most out of life which outlines what you should think about before you make your decision.
Copies of the form and brochure can be downloaded here, and links to our Member websites are here.
Types of Life Insurance
The following are the main types of personal risk insurance. Insurance companies will package the insurances into their own insurance products and often give the products their own names.
- Term life insurance. Pays the insured amount only if death or terminal illness occurs within the period set out in the policy. The insured amount may be level for the period or increase or decrease on specified terms (e.g. increase with the CPI or decrease in line with the increased risk of death a level premium will purchase).
The premium may be level in which case the insured amount may:
- Decrease in line with the increased risk of death with increasing age or
- Remain level throughout the period of the policy but with a higher premium.
- Endowment insurance. Pays the sum insured during the period of the policy or if the insured person survives to a specified age (often 60 or 65). As the sum insured will be paid at some stage, the policy has a value if it is cancelled that increases the longer the policy is in force. For some policies the insured amount increases with bonuses declared by the insurance company.
- Whole of life. Pays the sum insured whenever death occurs. As the sum insured will be paid at some stage, the policy has a value if it is cancelled that increases the longer the policy is in force. For some policies the insured amount increases with bonuses declared by the insurance company.
- Critical illness. Pays a lump sum when the individual suffers from one of a number of medical conditions listed in the policy (eg cancer, stroke, heart attack).
- Total and permanent disability (TPD). Pays a lump sum if your disablement is total and permanent and you are unlikely to be able to do your usual or similar work again.
- Disability income. Pays a regular income to replace your usual income when you can’t work because of sickness or disability. Usually a maximum of 75% of pre-disability income is paid. You can choose a ‘waiting period’ until the insurance is paid and a maximum payment period (e.g. 2 years or up to age 65) that will affect the premium you pay.
- Home loan insurance. Pays your mortgage or mortgage repayments if you die or are ill or disabled.
- Business insurance is the use of personal risk insurances to provide payments for the cost to a business of the sickness, disability or death of an owner or key employee.
Personal Risk Insurance
- Life Insurance. Sometimes refers to all types of personal risk insurance including disability and disability income.
- Living insurance. Covers all insurance that pays a benefit on illness or disability – used to differentiate from life insurance which is payable only on death or terminal illness.
- Critical illness also called trauma, crisis cover, major illness or critical condition insurance.
- Total and permanent disablement also called TPD or disability cover.
- Disability income, also called income protection, income replacement, income cover or total temporary disablement.
- Home loan insurance, also called Mortgage insurance.
Tips and hints for buying Insurance
The following are tips and hints when buying insurance:
Answer questions completely and honestly. When you apply for personal risk insurance the insurer will ask a number of questions about your health so that the insurer can assess the likelihood of you making a claim and setting the premium. You are obliged to answer these questions completely and honestly. If you don’t, the insurer is entitled to refuse a claim on the grounds of ‘non-disclosure’ and not return premiums.
- Policy wording. The policy wording is all-important in determining whether an insurance claim is paid. This is particularly true of living insurances, e.g. disability income and critical illness where you need to meet the disability definition or actually be diagnosed with one of the critical illnesses before a payment is made. You should either obtain the actual policy wording to compare policies and ensure that the chosen policy meets your needs or get advice from a financial adviser qualified to give advice on personal risk insurance to help you with policy wording.
- Shop around and consider options. You should, of course, shop around to get the best deal when you decide to buy insurance. Different companies’ policy wording (see previous section) may be similar but you should also consider the financial strength of the insurer if it comes to making a claim. You should consider what other benefits and insurance you have. Insurance provided through your employer is typically cheaper than individually arranged insurance and can generally be replaced by individual insurance when you leave your employer. (However, you should check as you may be left without insurance if, e.g., you have to leave your employer for health reasons.) If you have significant sick or other leave, a longer waiting period on a disability income policy will reduce the premium.
- Financial strength ratings. All licensed insurance companies must give you their financial strength rating before you apply for insurance or, if they don’t have a financial strength rating, the reason why (typically if they are small insurers). The financial strength rating will also be on the insurer’s internet site. This will give you an idea of the present financial strength of the insurer. If the financial strength rating is downgraded, the insurer must tell existing policyholders.
- Changing insurers. While you should always be considering the best deal on your insurance, there are some things you should be aware of if you consider changing insurer.
- The new policy wording may not be exactly the same which may lead to loss of options, new waiting periods or an unpleasant surprise when a claim is made.
- Your health may have changed meaning that existing conditions may not be covered by a new insurer and a new insurer may impose new terms before accepting the insurance. Your present insurer is bound by the terms of the present policy regardless of changes in your health.
- If for any reason you forget to disclose all health information requested to the new insurer, you run the risk of the new insurer declining a claim.
- If a financial adviser is recommending you change companies, ask what commission they will receive for the new policy and an assurance that the new insurance meets your needs at least as well in terms of price and features.
- There may be options under your present policy or your present insurer may be willing to change it to meet your changing needs.