Welcome (back) to our Six Stones series. Our financial adviser, Jordan, is sharing as many tips, ideas and advice for people going through a divorce as a humble blog will allow.
He’s staying away from specific financial advice – it’s all general advice over here, be sure to get personal financial advice before doing anything – but we hope you find some useful information in here as you navigate through/out of your divorce.
For most people, insurance is probably the most complicated financial product they’ll ever have to deal with.
And for a smaller (but not small enough, sadly) subset of people, it’ll be the most beneficial transaction they’ve ever been involved in.
In other words – most of us need it, but just what does it all mean?
Let’s start off by discussing some of the big terms that you’ll come up against when you’re exploring your options.
What Is Insurance?
We all know what insurance is, don’t we? But actually defining it can be a bit tough.
For me, insurance is how one person transfers the financial risk of something happening to somebody else.
We pay a ‘premium’ to the insurer in return for their commitment to pay us a ‘benefit’ should any of these risks occur.
They ‘pool’ all of these premiums into one big pot and – when properly managed – the money going IN the pool is higher than the money coming OUT.
We’ve explored this idea in a lot of detail so far, so I thought it might be useful to talk about the five specific insurances we’re focusing on in this series:
– Life Insurance
Perhaps the simplest of the insurances – when you die, the insurer will pay an amount of money where you ask them to.
There is, of course, more complexity in this which we’ll explore later, but this is the crux of it.
– Total and Permanent Disability
We advisers tend to skim over this policy, calling it ‘TPD’ insurance as though everybody else speaks fluent jargonese.
But it’s worth appreciating the full name. If you are totally and permanently disabled, you will receive a payment from your insurer.
All three terms need to be satisfied, which is where things get complicated. Proving you’re disabled can be hard enough – proving that it’s both total and permanent in nature bumps it up a few levels of difficulty.
– Critical Illness
This one’s also in the name – when you’re diagnosed with a critical illness, this policy will pay you an amount of money.
When we’re talking critical illness, think things like the Big 3 (cancer, heart attack and stroke), or other undesirable maladies like motor neurone disease, multiple sclerosis, major burns and encephalitis.
– Income Protection
I’ve noticed that this type of cover has become a little better known, if still quite misunderstood.
Unlike the previous three types, this one will pay you an ongoing payment to replace part of your income if you’re medically unable to work for a period of time.
This can be up to 75% in most cases, and kicks in after a certain waiting period. It’ll then keep paying you every month until either the benefit period finishes, or you’re able to go back to work.
– Business Insurance
This is a specialist area, so I won’t go too far into it here. Suffice to say that these policies cover the financial impact on your business if any of these events happen. So the policies are broadly the same, but the application is a bit different.
The others you can probably get away with arranging yourself – but for business insurance you definitely want to get specialist advice.
What Is It Not?
Insurance shouldn’t be seen as a potential windfall, or a lottery win, because it’s not. Instead, it’s a tool to help you get back on to the path you were on before everything fell apart.
So if you were on track to clear the mortgage, have the school fees paid and retire at 65 – your insurance should be designed to make sure this still happens.
But it shouldn’t be seen as a way to upgrade your financial trajectory.
Think of it as a safety net; not an incentive.
How Much Does It Cost?
There is a lot that goes into working out the price of insurance.
But we’ll focus on a few of the main ones:
– The likelihood of an event happening (higher the likelihood, the higher the risk)
o Built into this is an assessment of the likelihood of an event happening to you.
o So, if you smoke, it’s assumed that you’re at higher risk of contracting cancer, for instance, so your Critical Illness premiums will be higher than your (probably at least a little annoying) non-smoking friend.
o This is true for age as well – certain age groups have a higher statistical likelihood of having something go wrong, so they pay more for their insurance.
o And it includes your occupation too. A concreter will pay more to cover their ability to work than a solicitor because a concreter is more likely to hurt themselves.
o Is this all discriminatory? Absolutely – it needs to be, or else the pricing won’t reflect the actual risks involved.
– The amount of cover you’re taking out (more cover is more expensive, generally)
– The profit the insurer is looking to make on your policy
– The insurers historical, current and projected claims experience (if they’re haemorrhaging claims, they’re going to increase their rates)
– Though they won’t like me saying this, in Australia the rank inefficiency of the insurers systems and processes add a fair whack to the premiums they’re charging.
(Like I say, there’s a lot more that goes into the premium you pay for your insurance, which we’ll explore in a later post.)
Our next post will continue exploring some of these primary topics when it comes to insurance.