Navigating the insurance minefield

From life insurance to trauma insurance, disability cover and income protection, the choice of insurance options can be mind-boggling. What is the difference between them and which do you need?

“It is quite complex, which is one of the reasons people put off taking action,” says Michael Nowak, adviser & partner at Joe Nowak Financial Services Group and national president of the Association of Financial Advisers.

Determining which insurance cover is right for you comes down to your individual circumstances and budget, Nowak adds. “Through the advice process, we identify each client’s goals and budget and tailor their insurance recommendation to that.

“If they’re young and single, I’d say income protection and a small amount of trauma, and most people already have TPD [Total & Permanent Disability insurance] through their superannuation. As you get older, I would encourage a more comprehensive insurance policy.”

Life insurance

This established form of insurance pays out a lump sum on the death of the insured person. The money goes to the people you nominate as your beneficiaries. “People use it to enable their families to pay off debt, such as the mortgage, and to provide a capital sum for their family and loved ones,” Nowak says.

Total & Permanent Disability

Commonly referred to as TPD, pays out when on the advice of two doctors it is unlikely you will be able to ever work again if you become totally and permanently disabled. In such a traumatic scenario, TPD can be a comforting support as it covers upfront medical expenses, long-term living expenses and any modifications required to your home.

The top five reasons for TPD claims in Australia, according to insurance company company Asteron, are disease of the musculoskeletal system (43 percent); mental illness (18 percent); accidents (17 percent); nervous system disorders (9 percent); and cancer (6 percent).

Trauma insurance

This form of insurance pays a lump sum if you contract one of 40-plus illnesses covered by most insurance companies, including cancer, heart attack, loss of sight, hearing or speech, multiple sclerosis, motor neurone disease and others. The payment can cover medical expenses and your mortgage, and supplement short-term loss of income while you focus on getting better.

“I spend a lot of my time looking after my clients’ insurance claims and those with insurance generally get better more quickly as they don’t have the burden of financial stress,” Nowak says.

Income protection

Income protection is a monthly payment, up to 75 percent of your previous income, paid in the event that you cannot return to work after an accident, illness or major trauma. You continue to receive it until you can return to work, or if you can never return, until retirement age at 65. Income protection is tax deductible, but there is a waiting period before you can receive the payments – ranging from 14 days to two years.

“People’s biggest asset is their income, so it makes sense that you would take steps to protect that,” Nowak adds. According to ComInsure, one in six men and one in four women will suffer a disability between ages 35 to 65 for a period of six months or more.

Figures from Asteron show that the top four reasons for income protection claims are accidents (31 percent); musculoskeletal disease (22 percent); mental illness (17 percent); and cancer (9 percent).