Personal insurance

The number comes from your obligations

Cover is not a round figure someone suggests. It is calculated: what would need to be repaid, what income would need replacing and for how long, what education or care costs would still fall due, less what you already hold.

Done properly this usually moves the answer in both directions — some people are substantially underinsured for income protection and simultaneously over-insured for life cover they inherited with a super fund.

Four types, doing different jobs

Life pays a lump sum on death. Total and permanent disability pays if you can no longer work, on a definition that matters enormously. Trauma pays on diagnosis of a specified condition, whether or not you stop working. Income protection replaces a proportion of your income while you cannot earn.

They are not interchangeable, and the one people most often lack is income protection — despite an income being the asset every other plan depends on. Moneysmart's guidance on life insurance covers the general position.

Inside super, or outside it

Holding cover inside super is cheaper in cash-flow terms because premiums come from the fund rather than your take-home pay, and the fund may claim a deduction. It also erodes the balance you are trying to build, and the tax treatment of a payout differs — particularly for a beneficiary who was not a dependant.

Some cover types cannot be held inside super at all, or only in a restricted form. The right answer is frequently a split, and it depends on your marginal rate, your balance and who would receive the benefit. This overlaps directly with estate planning.

Definitions decide claims

Whether a TPD policy defines disability as being unable to work in *your own occupation* or in *any occupation* you are reasonably suited to is the difference between a claim paid and a claim declined, for the same person with the same injury.

Stepped premiums start cheaper and rise with age; level premiums start higher and rise more slowly. Which is better depends on how long you expect to hold the cover, and holding a stepped policy into your sixties is how people end up cancelling insurance at the age they most need it.

We read the definitions and tell you what they mean before you rely on them.

Duty to take reasonable care

You must answer the insurer's questions honestly and completely. Non-disclosure — even unintentional — is a common reason a claim fails, years later, when nobody can remember the application. The time spent getting the answers right is the cheapest part of the whole exercise.

Reviewing it

Cover set when you had a mortgage and two young children is the wrong cover once the mortgage is gone and the children have left. Insurance quietly stops matching the situation it was arranged for, and the premium goes on being paid. A review every few years, and after anything significant, is usually enough.