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Tips For Avoiding Common Insurance Problems

Buying insurance nowadays is something that is as common as setting up a bank account. That said many people fall […]

Buying insurance nowadays is something that is as common as setting up a bank account. That said many people fall for the hype created by insurance companies, they end up thinking that an insurance policy can make them millionaires. The truth is that policies like income protection insurance are there to mainly help you maintain your status quo when you’re not able to work.

You can end up with bad IP cover within your super

We like to start off by saying that you should only buy income protection insurance outside of your super if the marginal tax rate you pay is above 15%. The other thing you should bear in mind is that super fund type income protection benefits could cut out after just two years as opposed to continuing until you are retired which is common outside.

Even though these group cover type salary continuance insurance policies tend to be cheaper on the whole there are many conditions that could undermine your plans. For instance, there could be a lump sum offset whereby the income benefit you are entitled is reduced mainly because you received one large payment. This is very common with group policies.

Make sure that the contract specifies the lump sum payout and what it will translate into if broken into monthly payments over a period of five years or months.

Picking up the wrong TPD

There is a huge difference between the two main types of TPD insurance contracts that will provide you with a lump sum payment if you are permanently disabled. Many policies will state that for any payout to be received you should be unable to do any and all forms of work for which you are suited as per your education, training and experience. However, an “Own Occupation” policy will pay out if you are not able to work ever again within your current occupation.

Perhaps the classic example of this is a brain surgeon who loses his hand. He can no longer perform surgeries even though he could now work as a consultant or even a general practitioner. With an own occupation cover he will get a payout but with any other policy he would not. That said own occupation policies happen to be a lot more expensive.

There is another important fact to consider here i.e. occupational policies are just partially tax deductible within your super and so payouts can also become trapped within the funds if you are unable to meet a specific condition of release under the current super law.

Shopping just on price

Everyone wants a good deal; the problem with any type of insurance is that the cheapest option is what will get you into trouble when the time comes. It is important to consider the fact that insurance companies will price their products mainly based on the terms in their contracts that you sign. So, the more a customer is offered the more expensive the policy will be. Also, the more exceptions and conditions applied to the policy means that the lower will be the cover and also the longer its waiting period if it’s cheap. So, to put it simply, you get what you pay for.

Not reviewing your needs adequately

As your circumstances change so will your insurance needs. For instance, the overall amount of life cover a single woman needs will be very different from what’s preferable once she becomes the primary earning member of the family with kids and a mortgage to pay off. For people who are 30, the future earnings are their biggest asset. This is because a $300,000 insurance payment is not going to be good 35 years from today or until you manage to qualify for pension. That said it is worth protecting your salary at the age of 63.

Simply continuing with the income protection that you have agreed on with the same dollar value as your cover for the next ten years is just not going to cut it. Even with indexation your replacement salary is not going to be enough to fuel your lifestyle at that time.

As a final note always be totally honest with the insurer. Tell them if you drink excessively or smoke. This is because if they find that that something which affected your eligibility to begin with later on they will cancel your insurance. They may also not honor your claim later on.

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Mark has been an insurance consultant and agent for twenty years. Today, he runs his own insurance company based in Sydney offering income protection insurance.

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