Insurance

Insurance has long being a mis-understood product and as such is a major area of concern for those that are under-insured.

The concept of insurance is simple. Insurance is about the sharing of risk. People with pay to protect themselves from the risk of loss (damage, income etc.) or damage to property.

Insurers accept a pool of premiums from individuals, pay their expenses, take a profit margin and leave a sufficient reserve to meet claims. Insurers enter into a contract with each person to accept their premiums and in return guarantee to pay them a pre-defined benefit on the occurrence of a triggering event.

Insures have an obligation to treat all those involved equitably so that those who are considered a higher risk of claiming pay higher premiums.

There are two main categories for insurance (risk management):

1. General Insurance
2. Personal (life) Insurance

1. General Insurance

General insurance is designed to cover events, natural and man-made, that cause loss to property, either full or partial.

In most cases, people have some form of general insurance, however, it is important to be pro-active and check that you are not under-insured, to prevent finding out at the wrong time.

General insurance covers such things as cars, boats, homes, contents, private liability, business property and business liability. It is important to undertake a needs analysis of your situation to determine that:

• You are not over-insured and paying unnecessary premiums
• Your insurance is properly documented and you have secure copies of your policies
• You understand properly the extent of your insurance cover
• You uphold you responsibility under the insurance contract
• You are not un-knowingly self insuring yourself
• Insurance premiums can be reduced by using excesses on your policy which will provide cover above a certain level, by shopping around for insurance quotes to obtain the most competitive price, or by choosing to absorb some of the risk yourself and insuring for less than the replacement value. The later is called self-insurance.

There are basically two types of property insurance cover:

1. Indemnity cover – replacement at market value less depreciation for age, condition. and,
2. Replacement and Reinstatement – this cover is commonly known as ‘new for old’.

Replacement and reinstatement will provide new for old cover irrespective of age condition etc. These policies will allow the client to reinstate their property to the level it was before the loss.

Things you should look at coverage for:

• Home and contents – including special cover for listed valuables
• Motor vehicle insurance
• Motorcycles and off-road bikes
• Home owner’s liability insurance – to cover public liability claims for accidents occurring on private property.
• Boat, trailer and caravan insurance.

Some uncommon tips:

• If you are a strata title property owner (eg. unit) check that your body corporate’s insurance is adequate.
• People with home office’s should check that computer’s, faxes, printers etc. are covered under their private home contents policy.
• Investment property owners should be aware of additional cover available for fixtures and fittings and liability cover.
• Home owner’s liability insurance – to cover public liability claims for accidents occurring on private property.
• When opening your home to the public for inspections (eg. Selling, renting) check that your insurer will cover losses for this. Thieves often use this vulnerable time to strike.

Business Insurance

Business or commercial insurance is a complex area and one that is critical to the smooth running of a business as a consequence of loss. For this type of insurance cover you will normally need to seek the advice of an expert in the area due to its complex and detailed nature. Most business insurance providers will offer tailored packages that include a variety of covers (see below for examples).

An interesting note can be drawn from research published in 1996 by the Insurance Council of Australia (ICA) who reported that in relation to buildings owned by small business operators:

• 24% were severely underinsured
• 26% were significantly underinsured
• 20% were not insured
• 68% of businesses did not have loss of business income insurance
• 90% of businesses without this cover never go back into business after a serious loss.

Detailed in the table below are the types of general insurance for business:

Type of Insurance
Risk Covered
Accidental damage insurance
This insurance covers accidental damage to building, stock and contents at business premises.
Burglary insurance
Theft of stock or contents after forced entry into the client’s business premises constitutes burglary insurance. You should also ensure you have sufficient cover to cater for high turnover periods. Damage entering is also covered.
Construction insurance
To cover fire, theft and damage to contract works.
Directors & officers liability insurance
Liability cover for directors and officers.
Electronic equipment insurance
Theft or damage to computers and other electronic equipment. You made need cover for the cost of restoring or retrieving data. Usually fire is included.
Employee dishonesty insurance
This covers against embezzlement of money, stock and contents by employees.
Glass insurance
This covers the repair or replacement of external and/or internal glass and plastic.
Loss of business income insurance
This insurance covers loss of business income following damage covered under a property damage, burglary or accidental damage policy. Additional cover may be required to cover the cost of setting up elsewhere and the reconstruction of your book’s by the accountant.
Machinery breakdown insurance
To cover the breakdown of electrical or mechanical plant and equipment.
Money insurance
To cover the loss of cash or negotiable items from business premises or when in transit between their business premises and/or a bank and/or your home.
Product liability insurance
This covers liability to pay compensation for personal injury or damage to property caused by a defective product.
Property damage insurance
Covers damage of stock, contents and buildings at business premises often referred to as a fire policy. It normally includes storm, tempest and earthquake etc.
Public liability cover
Legal liability to pay compensation for personal injury/damage to property due to negligence connected with your business.
Tax investigation insurance
Covers professional costs associated with a tax audit or in-depth investigation by the Australian Taxation Office.
Transit insurance
Tools, stock and equipment for loss or damage during transit.

2. Personal (Life) Insurance

We cannot over emphasise the need for people to have in place adequate insurance policies to protect themselves, their family and their assets. Insurance enables you and/or your family to maintain the standard of living you are accustomed to should you suffer accident, sickness or death.

By far your greatest assets are your good health and the income that you will enjoy throughout your working life. Should these factors be affected, the financial position of your family could be jeopardised. When asked what your greatest financial asset is, most people respond saying either their car or family home. In reality for many people, their greatest financial asset is their ability to earn an income between now and when they retire.

Take for example a 35 year old who plans to retire at age 60 and who earns $50,000 per annum. This ability translates into a financial asset of $50,000 x 25 years (until retirement) = $1,250,000. This is without any pay rises factored in. Without this you (in the event of serious illness) or your family (in the event of your death) would substantially suffer financially.

People often insure their car or home as replacing these would require a significant lump sum of money. But compare replacing a car valued at $40,000 or a home at $500,000 versus the 35 year old in the above example not being able to produce an income for the next 25 years before he/she retires!

In the event of you not being able to work again a “lump sum” policy to clear any debts and an “income stream” policy to provide you with sufficient income until retirement.

In the event of death a “lump sum” policy to clear debts and to provide a capital amount from which to provide an income stream for your dependents.

However, as all insurance is subject to underwriting approval there are often situations where the recommended combination of policies needs to be adjusted to ensure that you and your family remain financially protected.

Types of Personal Insurance Available

Death Insurance

This cover provides a lump sum benefit to your beneficiaries upon your death. The benefit is designed to repay loans where applicable, meet funeral and other expenses and maintain the future household income of your family.

Policies can be owned in your own name(s) (or owned by partner). This allows joint ownership of the life policy which would revert to your partner automatically upon death (on production of certified copy of death certificate).

Policies can also be owned through your superannuation fund. The trustees of the superannuation fund are entitled to claim a tax deduction for these premiums paid to provide you with cover. If a claim is paid to dependants the payment will be tax free up to the deceased’s pension RBL.

Total and Permanent Disablement (TPD) Insurance

This cover provides a lump sum benefit upon assessment that you are disabled by sickness or injury and will never work again in an area suited to your education, training and experience. Whereas trauma cover is provided upon medical diagnosis, TPD requires a judgment on the likely effects of the illness or injury on your ability to work in the future. For this reason, TPD claims can be delayed until the likely future effects can be determined.

Trauma Insurance

Trauma insurance is designed to provide a lump sum payment when the insured suffers for the first time certain specified medical conditions (eg. heart attack, stroke, cancers, kidney failure, etc). The cover extends to specified injuries detailed in the offering companies information brochure. Trauma insurance was introduced to cover these areas for which neither disability insurance nor private health cover would extend cover or provide a lump sum to help meet expenses. Compared to TPD cover, it is relatively expensive, however the lump sum payments are made on diagnosis of condition and the level of cover taken out should be sufficient to pay out any debts and/or meet medical expenses.

Income Protection Insurance

Income protection is designed to replace up to 75% of your income in the event that you are unable to perform one major function of your job. This “disablement” can be permanent or temporary and result from either sickness or accident and payments will be made either until you return to work or until your insured period ends. The maximum payment period is up to age 65, which would then enable you to commence drawing down on your accumulated superannuation.

It is an important part of insurance as it allows you to pay for regular living expenses while being out of employment. Premium payments are tax deductible, however, payments from the policy are assessable as income and therefore subject to tax in the event of a claim.

Personal insurance is something that you should seriously consider if you or your family rely upon your ability to earn an income to meet living expenses and/or if you have any debts that would require extinguishing if you were to pass away to ensure financial security for your loved ones.

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