Taking out cover can be a difficult and confusing experience given the plethora of products available. Here are some tips on how to avoid common traps and pitfalls.
Whether it’s home, car, health or life insurance, ‘one size doesn’t fit all’. Matching your needs to the right type of cover can be a complex business, so it pays to go in with eyes wide open and seek professional advice.
How do you know how much coverage you need?
Before you begin to compare policy benefits and costs, first make a realistic assessment of how much coverage you need. Underestimating cover is a common mistake that leaves many people in a lot of trouble in the unfortunate event of a claim.
In the case of home insurance, underestimating the right amount of cover to replace your belongings or the building may actually mean that you are unable to claim for the full value of any loss. For example, if your home value is $500,000 and you’re only insured for $250,000 (ie 50% of real value), then your insurer can only pay out a maximum of 50% of the amount you potentially need.
Making a proper assessment is particularly vital when it comes to your personal life and disability insurance, since the amounts of cover required can often be a lot higher than you think and the risks of leaving yourself short can have disastrous consequences on the livelihood and financial security of your family. Some may think that a couple of hundred thousand in life cover sounds like a lot, but if there is a $300,000 mortgage, two kids in school and $3,000 in monthly living expenses involved, then $200,000 could be inadequate if the breadwinner can no longer provide income.
Questions to ask before buying a policy?
Do you really know what you are purchasing when you buy insurance? A few simple questions can be very revealing. You should reconsider buying a policy if the answers to these questions do not satisfy you.
- What are the exact circumstances that will qualify for a claim?
- What events are specifically excluded from making a claim?
- What are the specifics on definitions – for example, on an income protection policy, how is “Total Disability” defined?
- Is renewability guaranteed, or does the insurer have discretion to arbitrarily withdraw cover at any time?
- What additional benefits are available apart from the main benefit? To use the example of income protection again – are there additional benefits paid for rehabilitation expenses, hospitalisation, specific injuries or waiver of premiums during claim?
- Are cover increases offered regularly or are benefits indexed to inflation?
Never shop on price alone
As the list above may suggest, the old adage that ‘you get what you pay for’ is especially true when it comes to insurance. A ‘too good to be true’ price may mean there are limitations and exclusions on cover that may only be discovered when you come to claim. There is a big difference between comparing the cost of a policy and its actual value.
A classic example can be found in the area of income protection where policies often known as “sickness and accident” or “personal accident” may have low premiums, but will have no guarantee of renewability if your health or occupation changes. Beware also of a limitation of perhaps two years on benefit payments and severely restrictive claim definitions.
Professional help removes the worry
When it comes to your personal life and disability insurances, enlisting an adviser to help assess your cover requirements and the relative merits and costs of different policies can be an invaluable advantage. The experience and research capability of a financial adviser can take all the worry out of the process and ensure you achieve the dual goals of maximising quality of cover, while minimising costs.