Common Insurer Fraud

The banks have been copping a lot of bad publicity recently – one of the reasons has been the selling of insurance, and the handling of claims.

Even though insurance is a necessity, it's a sad reality that many policyholders end up disappointed when the time comes to make a claim. Often, it is only then that they discover the product they bought was not what they thought it was.

Today, let's examine three common policies and look at areas where misunderstandings commonly occur.

INCOME REPLACEMENT INSURANCE (also known as salary continuance)
The purpose of this insurance is to compensate you if you are unable to earn a living due to ill health or accident. For this reason, the premiums are tax deductible if the policy is held outside superannuation. The proceeds of any claim are taxable, as they are treated the same as salary. There are two basic types of policy: one that replaces part of the income you are earning at the time you make the claim, the other that pays you an agreed sum in line with the policy wording. Most policies will pay no more than 75 per cent of your earnings, as an incentive to return to work.

Suppose you were earning $90,000 a year with a mining company, and then lost your job and took a new one paying $50,000 a year. Even though you may have been paying premiums for years based on a salary of $90,000 a year, unless your policy specifically stated that you would receive the equivalent of 75 per cent of $90,000 a year if you were unable to work, the policy would compensate you at the rate of 75 per cent of $50,000 a year. Obviously, the policy that pays the higher sum would be more expensive to take out.

There are often misunderstandings when a person is out of work, and then becomes ill, and tries to claim on the policy. They may receive nothing unless the contract included an agreed-sum clause. There is a further complication if the policy is held within super, as policies are only be allowed to pay out where the member has ceased, or temporarily ceased, employment due to injury or illness.

TOTAL AND PERMANENT DISABILITY (TPD)
This is a particularly contentious one, which has been making headlines in the last few weeks as claims are being denied by insurance companies in situations where policyholders felt they were being unfairly treated. But the words "total and permanent" mean exactly what they say, and the fact that you are let go from one position because something happens in your life that makes you unable to work in that job does not normally entitle you to claim unless your policy includes an "own occupation" clause.

For example, an outdoor worker may have a serious injury, which precludes outdoor work in the future, but that may not stop them getting a job in a clerical role. Unless their policy included an own occupation clause, the claim would be denied. Here is the killer: many people tick the TPD box when arranging insurance through super, and think they are covered. But in 2014, legislation was passed making it illegal for TPD insurance taken out within super to have an own occupation clause. The purpose of this was to prevent insurance payments being trapped inside super until retirement, due to the strict application of the rules of release.

Therefore, if you need an occupation-specific TPD insurance, you need to set it up outside of super.
It's worthwhile taking advice. It may be possible to have part of your TPD policy inside super and part outside super.

TRAUMA
This pays you a contracted sum on diagnosis of a serious illness, such as cancer or heart attack. The policy cannot be held within super. It can be taken out on its own, but is often included with a life insurance policy. This is where confusion can arise. Suppose you took out a $200,000 life insurance policy that included $100,000 of trauma cover. If you subsequently got a serious illness and successfully claimed the $100,000 trauma cover, the remaining life insurance left to be claimed would be just $100,000. Again, take advice: a reinstatement option could be included, which would allow you to buy back the lost death cover.

The key take-home message here is to take advice before buying insurance. It's a complex topic, and there are many options available. It is definitely not a one-size-fits-all situation.