The biggest mistake I ever made was not paying enough attention to life insurance while I was young, fit and healthy. I first came across the term ‘life insurance’ when I was in my mid-twenties. I had just landed a corporate role at KPMG, and one of the perks was a life insurance policy and some income protection, paid for by the company. It was outlined in my letter of employment, yet I quickly forgot about it.
A couple of years into my tenure, I became quite ill. Eventually, I had to take extended time off work, which was a challenge in itself. Apart from the emotional challenge of not working, my husband and I were faced with a number of financial challenges. We were incurring significant medical bills that weren’t covered by Medicare and only a small portion of which was covered by private health insurance.
Over the space of two years, I ended up taking over six months in unpaid leave, and once I returned to work I was only capable of doing so in a part-time capacity. It was only afterwards that I thought, ‘Hang on. Didn’t I have some sort of insurance in my super policy?’ Yes, I did. But it was too late. My big mistake cost me a lot of heartache. But I did learn three valuable lessons as a result.
Lesson 1: Underwriting takes time
My first lesson was in the concept of underwriting, whereby an insurer conducts an assessment of your medical history to determine whether or not they will insure you. As my insurance was automatically put in place by my employer, I was never medically assessed by the insurance company. So it meant they had to do it once I lodged my claim. This process ended up taking nearly two years. Yes, you read that right.
First of all, there was a lot of paperwork. I had to fill in the specifics of my claim. My employer had to fill in specifics of my claim (they had to confirm my position, income, level of absenteeism and so on), and my doctor had to fill in details of my medical history. All this took time.
Underwriting is a key component of every form of life insurance. Do not be fooled by TV and online advertisements promoting how quick it is to get cover. Make no mistake: You will have to undergo extensive questioning regarding your medical history. The question is, would you rather spend time doing that now, when you don’t urgently need a claim payment, or would you rather wait until you’re sick and short of cash?
When you are looking at obtaining cover, be sure to find out when the medical assessment will take place and find an insurer that will conduct their investigations upfront.
Lesson 2: Pay attention to the fine print
The next lesson was in the importance of reading the fine print. One of the conditions of my income protection policy – which I wasn’t aware of until later – was that I had to be off work for at least six months. Sadly, I kept trying to return to work, and in doing so I kept re-setting the clock on my waiting period. Also, my policy didn’t cover me if I returned to work in a reduced capacity. The end result is that after a full two years, my insurance claim was finally paid, but it only reimbursed me for three weeks of lost income.
When it comes to income protection, you want to be familiar with things such as:
• The waiting period. This is how long you have to be off work before your claim starts, not to be confused with how long you have to wait before your claim is paid.
• The benefit period. This is how long your payment will be paid for. Let’s say you are off work for five years. Will your income protection pay you for two years? Three years? Or however long you are off work?
• Will you be covered for drop in income?
• Do you have to use up your sick leave or can your claim be paid even while you are receiving other forms of income (such as sick leave pay or Centrelink support)?
Had I actually paid attention to my insurance policy, and taken appropriate steps and sought professional advice at the time, I could have received over $150,000 in compensation – instead of $3,000! How is this possible, you ask?
Lesson 3: Not all insurance policies are created equal
Because not all life insurance is the same.
Life insurance can be obtained from three different distribution channels, even if it is ultimately held with the same insurance company. The channel through which you obtain your cover will affect the cost, as well as the terms and conditions. These channels are known as direct (obtained directly from the insurer), group (obtained through your employer or super fund) and retail (obtained through a financial adviser).
I had a group policy, which meant it was subject to terms and conditions that my super fund had agreed to with the insurance company. Most super funds offer a default amount of cover, so you may not even realise that you already have some form of cover with your super, especially if you are with an industry super fund. The cover that you can get through super includes death cover (life insurance or term life), total and permanent disability cover, and income protection (also known as salary continuance).
In my case, this meant that while my cover in super had a long waiting period of six months and didn’t compensate me for loss of income if I returned to work in a reduced capacity, there were other income protection policies that would have. This experience was a turning point for me, and was one of the reasons why I decided to create Women with Cents – to stop other women from making the same mistakes that I did!
This is an edited extract from my book, Wonder Woman’s Guide to Money – order your copy today.