- Why have insurance?
- About insurance
- Types of insurance
- Excess
- Co-insurance clauses
- Keeping policies up to date
- Looking after your documents
- Claims checklist
- When insurers refuse claims
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Why have insurance?
Stories about devastation and loss are in the news every day but still the majority of people believe 'it will never happen to me'. Maybe it won't. But if your luck runs out and something does happen you'll be glad you have insurance.
Insurance can protect you and your loved ones from the unexpected, buying you peace of mind in case trouble strikes. Put simply, insurance pays for the replacement of lost or destroyed items in certain circumstances and reduces your personal loss or damage if the unthinkable happens.
Most people are surprised to find out how much their assets are worth because when they think of assets they think mostly of big ticket items like cars or the family home and forget about 'incidental purchases' made over a long period. The value of these 'every day' items-clothes, furniture, your CD collection and floor coverings, for example, really start to add up, especially if you had to replace them at today's prices. If this sounds like you, now is the time to do a stock-take of your assets, including the lower value items you've accumulated over several years without really realising it.
About insurance
- To calculate your premiums, insurance companies work out how often a certain event (a bushfire, for example) is likely to occur among policyholders. The cost is then averaged out for each client and the insurer's additional costs such as Government stamp duty are added.
- The higher the risk of loss or damage, the higher the insurance premium. For example, if you live in a high crime area your car and home contents insurance premiums will be higher and you may have to install extra security such as deadlocks on doors.
- To be able to insure an item you must own it, or be responsible for it.
- You should buy enough insurance to replace your assets or possessions at today's value.
What to look for in a policy
- what is/isn't covered?
- will it replace items with new goods or just pay the depreciated value?
- will you pay an excess on claims? How much?
- does it have a "coinsurance" or "average" clause?
- is the company reputable?
- does the company have a good claims record?
Warning! Underinsure at your peril
A recent survey found that 52% of Australian households were underinsured and one in three adults had no personal insurance cover at all.
Types of insurance
There are many different types of insurance to choose from, each offering a different type of coverage. Greater coverage usually costs more but higher premiums don't necessarily mean you're getting better coverage. Be sure to read all the terms and conditions, especially the exclusions, before signing on the dotted line
Health insurance
Protects your most important asset-your health. Many people take out health insurance to add extra benefits to those already offered under the Federal Government's Medicare scheme. The Federal Government introduced a 30 per cent rebate scheme to entice more people to take out lifetime private health insurance and from 2000 people over 30 joining a private fund for the first time will pay a 2 per cent penalty on top of the base rate for every year they delay joining, peaking at a 60% penalty-around $4,000 for top cover-for persons aged 60 joining for the first time.
Income protection insurance
Income protection insurance provides an agreed continuing income (usually 80 per cent of your normal earnings) if you are unable to work due to illness or injury.
Life insurance
Life insurance is designed to help families cope financially if one of the parents dies or is incapacitated. Life insurance usually is paid when the person-insured dies, or when the person reaches an agreed age-say 60 or 65. The policy can be surrendered at any time and the accrued benefits are paid to the policyholder. The cheapest form of life insurance is term insurance, which pays a benefit only if the person dies within a specified period. Some term policies now provide up to 80 per cent of the death benefit if the person insured falls terminally ill before the age of 65 to one of a list of specified diseases. Purchasing life insurance through your superannuation fund can save you money because your employer pays the premium direct to your super fund using pre-tax dollars, which are deductible expenses. However, check the value of cover you are offered and shop around for the most appropriate policy for your family's needs.
Trauma cover
Sometimes called 'dread disease insurance', this cover is usually available as part of a term policy. Trauma cover covers you in the event of a life-threatening condition or illness like a heart attack or cancer that prevents you from working for some time, or may even force early retirement. Trauma insurance pays a tax-free amount that is usually a percentage of the sum insured.
Total and Permanent Disablement
This type of cover is usually available with life insurance and is a standard feature of superannuation policies. Policyholders who become permanently disabled and are no longer able to work are entitled to a lump-sum payment. The cover also allows for disabling diseases or disabilities that leave the policyholder unable to work. Speak to a financial adviser about the wide range of policies available.
Consumer Credit Insurance
If you take out a loan, consumer credit insurance is worth considering. It will help meet your loan repayments if you become ill and are unable to work, and can also be extended to include employment cover. Most policies include cover to repay your loan if you die.
Home insurance (also called 'building insurance')
Your policy should cover damage to the building structure itself resulting from a variety of unexpected disasters, including fire, earthquake, vehicle impact or crashing tree, to the loss of a roof in a storm. It should also cover the cost of replacing the building to its original condition if it is damaged or destroyed, including windows, ceilings and floor materials, pergolas, paving, driveways, clotheslines, in-ground swimming pools and garages; demolition costs, removal of debris and architect and surveyor fees; legal liability cover that protects you against a person being injured or property damaged as a result of your negligence. (Most insurers provide a minimum of $5 million in cover).
Home contents insurance
There are two basic ways to insure home contents. One is to insure household goods while they are on your property. This policy should cover against fire, smoke, lightning, earthquake, theft-with or without forcible entry, malicious acts, water escaping from any tank, accidental breakage of glass, riot or civil commotion, storm, wind and rainwater. Another option is to insure personal effects accidentally lost or damaged when they are with you either inside or outside the home using 'valuables' cover as an optional extension of your contents insurance. If you are planning to travel overseas, check if your policy covers you outside Australia. Also check the limit of your cover for specific items.
Motor vehicle insurance
There are various levels of motor vehicle insurance. As part of the vehicle registration process, all drivers must have third-party insurance cover which protects the driver of the registered vehicle against claims arising from death or injury to another person caused by the driver's negligence. Third-party property damage insurance is relatively inexpensive and covers claims for damage to someone else's vehicle or property (but not yours) and is strongly recommended as the minimum cover. Comprehensive insurance offers protection against damage to, or loss of, your vehicle, in addition to third-party property and fire and theft policies. Some policies may also cover towing and legal costs after an accident and limited cover for personal property stolen from your car. Policies vary widely so shop around and read the fine print.
Travel insurance
Travel can be exciting but an adventure can quickly turn into a nightmare if things go wrong on holidays and you find yourself stranded far from home without money, papers or possessions. Travel insurance is invaluable when you are injured or ill on holidays and need urgent medical attention but make sure you read the fine print carefully so you are aware of exclusions for dangerous activities and circumstances that the policy does not cover.
Loan insurance
There are various types of loan insurances available to protect both the lender and the borrower. For example, if you need to borrow more than 80 per cent of the value of your home, you will have to pay mortgage insurance. This covers the lender, NOT YOU. In certain circumstances where you are unable to repay your loan, the insurance may repay it. This type of coverage should not be confused with mortgage protection insurance or credit protection insurance, which covers YOU. Such policies may repay part or all of your loan in certain circumstances where you are unable to make payments yourself..
Excess
If you make an insurance claim you will usually be asked to pay a specified portion of that claim yourself e.g. the first $100 or $300 of each claim. This is called the excess. When you buy insurance you can nominate how much your excess will be, or choose to have 'zero excess'. The lower the excess, the higher your premium will be.
Co-insurance clauses
If you underinsure your home and it is totally destroyed, the insurance payout won't be enough to build a new home of the same size and quality. If the home is only partially damaged, the insurance company may apply a co-insurance (or average) clause.
This means if your house is valued at $100,000 but insured for only $75,000 and a fire causes $10,000 damage, the insurer may be able to reduce the value of your claim by the percentage the house is uninsured-in this case paying only $7,500.
Keeping Policies Up To Date
Before renewing your insurance policy each year review the current value of the items you're insuring. Don't rely on your insurer to increase the value of your property at renewal by the rise in the Consumer Price Index. Work out what your assets are worth and tell your insurer. Family changes, modifications to your home, new furniture, retirement or a decision to work from home are typical of the adjustments that can occur in your life and may require adjustments to your insurance policies.
Look after your documents
In case of a crisis, keep your insurance documents at hand. Think about storing a photocopy of your policies, valuations and inventories (plus other valuable documents) in a safe place away from your home. Then if your home is damaged by fire, you will still be able to call in the insurer without delay.
Claims checklist
If you have a claim - or think you have one-contact your insurance company straight away. Use this checklist to help you process your claim.
- notify police immediately of any loss
- notify your insurance company and/or broker
- take steps to prevent further damage or loss
- fill out the claim form and return it promptly
- read the policy and make sure you're covered
- write down the chain of events
- list any supporting evidence you have
When insurers refuse claims
The insurance industry pays out most claims. In fact, only 0.029 per cent of the 2.2 million claims made in Australia in 1996-97 were disputed, so you can usually expect your insurer to honour the contract it has with you.
The main reasons general insurance claims were refused were*:-
- the existence of a condition or exclusion clause 33%
- fraud 19%
- non-disclosure 16%
- claim not covered by policy 16%
- disputed amount of compensation 10%
- no current policy in existence 4%
- failed to prove amount of loss 2%
Source: Insurance Enquiries and Complaints Ltd (IEC).
