11 October 2012

Insurance: To bundle or not?

When it comes to life insurance, there is bundling and there is bundling! Confused?

Usually ‘bundling’ in insurance is about having multiple policies with the one insurer and negotiating a price reduction. You may be able to do this with stand-alone life, total and permanent disability (TPD), and trauma insurance.

But you can also have one linked policy that bundles together all three types of insurances.

The choice between linked and stand-alone bundling comes down to your individual circumstances, but in most cases stand-alone policies will offer you more flexible cover. Of course flexibility comes at a cost, not least because stamp duty is payable on each of the policies. But the difference in premiums may not be as great as you imagine and it may well be worthwhile to pay that bit extra.

Take for example the figures from Lifewise/Natsem1 that one in five Australian families will be impacted by the death of a parent or a serious accident or illness that renders a parent unable to work. The most important issue is to make sure you have sufficient insurance cover to cope with such a situation.

So what is the difference between linked and stand-alone policies?

Let’s say you had $1 million cover in life insurance, $700,000 TPD cover and $350,000 trauma cover, all in a linked policy.

If you need to make a claim on trauma or TPD, then you may lose the opportunity to claim on your life policy in full.

For example, you may be in a bad accident and no longer able to work, and might then make a claim on your TPD policy. In many cases, your life insurance cover would then reduce by the claim amount as it is considered a shared risk. So, rather than having $1 million in life cover you would now have $300,000.

In contrast, if you had stand-alone policies, after you made a TPD claim, your life insurance would remain unaffected at $1 million.

Buyback options

As a solution, you might consider an optional buyback, double benefit as part of your linked policy strategy.

The optional TPD and Trauma buyback benefit, allows you to repurchase the life cover 12 months after satisfying the conditions of a claim. Polices vary with some policies reinstating the cover 12 months after the date of the claim event, whilst others reinstate 12 months after a claim is paid.

The optional double TPD and Trauma benefits will reinstate the life cover 14 days (standard survival period) after satisfying the conditions of a claim. Future premiums on the life cover will also be waived.

How much cover?

Another consideration when taking out insurance is how much cover you should have in life, TPD and trauma respectively. This is something you should discuss with your adviser but the answer will normally depend on your individual financial commitments, family needs and also your age.

Younger Australians, for instance, should consider having TPD cover that is at least equal to that of life cover. Imagine if you were to have an accident at 35, which left you unable to work. Your life expectancy may well be another 45 years, requiring a significant lump sum to maintain special care and general living costs over time. And if children and a dependent spouse were in the picture, their ongoing needs also must be taken into account.

Inside super?

The importance of life, TPD and trauma cover cannot be underestimated. While you can obtain cover through your superannuation for life and TPD, you need to make sure it is enough to meet your needs and that you can access the money should something happen.

Super may allow you to pay for the cover with pre-tax dollars but if you needed to claim on your TPD, then it may prove more difficult to get your money out of the fund.

One reason is that TPD within super covers “any” occupation rather than “own” occupation so there is a chance you may not qualify for a payout. In addition, there may be a delay in getting the money as the payout is made to the trustees of the fund initially rather than being paid directly to you.

Your age can make a difference too. If you are aged 60 years or over and receive a TPD benefit, you can access your entire super tax-free. But if you receive a TPD benefit and are under 60, there may be tax payable, which will reduce your payout.

Another factor to consider is tax on death benefits, which may be taxable depending on your beneficiary. If the benefit is paid to a dependant it will be tax free. However, if a death cover benefit is paid to a non-dependant, tax will be deducted

As a result, you might prefer to have your cover outside super, or additional cover. Again, it is a decision best made with the benefit of professional advice.

Life insurance is really all about your individual needs. Not only do these needs change over time as your family grows and your liabilities wax and wane, but they differ from person to person.

That is why it is important to regularly check your policies to ensure that they still meet your current needs.

The author is an employee of Verante Financial Planning in Castle Hill, Corporate Authorised Representative of Magnitude Group Limited, Licence No 221557, Magnitude Group Limited ABN 54 086 266 202.

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