What to consider when altering your insurance policy

We always encourage people to ensure their current policy is covering their needs but when it comes to altering your insurance policy, due to financial services legislation it can make things rather tricky.

As a financial adviser, if anyone is looking for advice on appropriate sums insured, comparing insurance policies from different companies, or advising you on the best course of action it means we would have to understand your current financial situation, your goals, research the best advice for you and present that advice via a document called a Statement of Advice (SoA).

Initially, you would have received one of these documents when you took out insurance with us, however the same process would need to followed to make alterations to your policy. We charge a fee in these instances where we provide personal advice but this may not represent value for you. You can blame successive governments for the introduction of these rather overzealous compliance restrictions, however we feel that with some education about the common elements on your policy that can be altered you can achieve a much better outcome, for no extra cost. 

There is nothing from stopping you requesting the policy alterations yourself, rather than receiving advice from a financial planner. This is a self-directed approach where we simply implement the changes you request.

Below we go through some things to consider when changing your policy.

If you have an existing policy with us, you can send an email with your requests and then we can even order some alteration quotes based on your requests, and even for multiple scenarios you wish to be quoted on. That way you can see the differences in premium from your current cover, compared to the scenarios you wish to be quoted on. To enforce the change, a signed letter with your name, address, policy number and your policy request is all that is needed.

Alterations of your existing policy (self-directed):

With this option we are happy to take your instruction and complete the alterations on your behalf. It’s worthwhile to note that when you provide us instructions to alter your policy that we are not providing you with advice.

In these instances we do not charge a fee to handle the administration of your existing policy. If you need advice from us I have included some information at the end of this article, as this is a service we charge for.

These types of alterations could be

• Changing your sums insured. If increasing the sum insured you may need to go through underwriting (health assessment) but there may be ways to increase your coverage at your policy anniversary without having to do this.
• Alter the benefit period or waiting period on your income protection.
• Update the beneficiaries on your Life insurance to ensure the funds are paid to where you want them to go.
• Administrative changes such as address, payment details, superfund payment details, phone numbers etc.

Income Protection: 

Generally there are three things you can elect to alter with your income protection which influence the premium.

• Waiting Period: The options are 30, 60 or 90 days and the longer your waiting period the cheaper the premium becomes. Obviously the longer the waiting period, the longer you have to wait until you can receive a payment when claiming, so it’s important to think about how you and your family would cope over this period with no income.
• Benefit period: Generally you can have a 5yr benefit period or a benefit payable to age 65. Again, a shorter benefit period (5yrs) means a cheaper premium because the insurer would be paying a benefit for a shorter period of time. It’s important to think about what you would do for an income after the benefit period expires if considering a 5yr period.
• The monthly benefit (sum insured): This is how much the insurer pays you in the event of a claim. The lower the monthly benefit the lower the premium, but it’s important to remember that this is taxable like a regular income, so make sure you can cover your costs of living after paying tax. An income tax calculator can help you determine what your net income is after tax. Generally most income protection policies obtained prior to September 2021 cover 75% of your gross income plus superannuation contributions so it’s important to make sure you are not over-insured as the insurer caps their payments at these levels. These policies are generally better quality than those obtained after September 2021. For policies obtain after September 2021, they will generally cover 60-70% if your gross income (no super contributions).

Life & TPD:

Think about what are the impact if you were die or if you were permanently disabled and unable to work again (TPD). In this case things to consider when determining your sums insured are:

• Payout your debts: Make sure to payout your debts such as mortgage debt, personal debts (personal loans, credit cards, etc) and consider if you want it to payout any investment debt so that any income earned from the investment can be paid to you or your family.
• Cover your final costs: It costs money to die. So cover your funeral expenses, legal/estate planning expenses, and any medical costs. We generally use an amount between $30-$50,000 for this.
• Consider covering your children’s education expenses: These costs can certainly add up if going to private schools, university or any other intended study.
• Create a lump sum of capital that can be used to help fund your living expenses: What we mean by this is that in the event of death, your family/household no longer has your income coming in but they will likely have similar living expenses. For TPD, in the event of you being unable to ever work again due to permanent disability, you will get your income protection payments (if you have that cover) but this will only cover 60-75% of your income, so it’s likely you may need extra funds to cover your costs of living and its likely you will incur ongoing medical costs. For instance if you or your family need $50,000 per year for 20 years, and its assumed to be invested at 3%, then you would need a lump sum of $766,190 to do so. At the bottom of this article is a ready-reckoner for these calcs.

Trauma (Critical illness / Living benefit) insurance: 

This cover is paid on diagnosis of a critical illness, so it’s really to help with covering any medical costs, access to treatments not covered by medicare or private health and even help to cover any debt repayments. One of the most important things to consider with this cover, is if you suffered a critical illness what are the impacts on your spouse if they need to reduce their work hours to help with your care, treatment, transport etc. Generally at a minimum the unaffected spouse may have to work part time or sometime they cannot work. To calculate the sums insured we generally consider

• Covering Medical costs, treatment etc of up to $100,000 to $200,000. There is no set figure for this because it depends on what you would like your options to be when suffering a critical illness
• Do you need help to cover any short-term debt repayments to take the burden off the family?
• Cover 50%-100% of your spouses’ income for 2 years, so that they may work part-time or not have to work at all. This allows them to reduce stress about the financial burden occurring from suffering a critical illness and focus on your treatment emotionally.

Not sure what to do?

Complete an in-depth review and personal advice – This is a paid service:

If you are unsure what you need to alter or would like to complete an in-depth policy review we can do that too. Generally, an in-depth review would compare the price, policy features & definitions, and structure to other insurers on the market as well as taking into account your current circumstances (financially, personally and medically) . This process can take some time for us to complete but at the end of the process, we will have recommended the best insurer for you by taking into account all of the above parameters. This way you have certain peace of mind that your cover is working efficiently for you and that you and your family are protected. As this option requires us to provide you with personal advice, we would charge a fee to cover our time.

It is also worthwhile noting that changing insurers will require you to complete a new application and go through underwriting, where they will assess your overall health. If you have had any changes in health then an insurer may exclude these conditions from payout or increase your premiums (called a loading) as they are taking on more risk. Rest assured we can guide you through this process.

We also consider what features you may gain in switching insurance contract but importantly what features you will lose, as this could mean the difference between making a successful claim or not. It is really important to get this right when changing insurers, and particularly for income protection policies setup prior to September 2021 as you will need these covers at the most important times of your life. You do not want to be denied a claim because of an obscure or ineffective insurance policy definition/wording or feature.  It’s worth pointing out that the cheaper policies with a new insurer can become more expensive than your current insurer too.

The bottom line is if you think you need to make some changes to you cover, please get in touch!

As a reminder, here is an information sheet that explains the different covers that you may hold or consider.