Investment Advice and Planning: Current Situation & Profile - Module 1.4 Personal Insurance

Insurance cover becomes important as lost or damaged assets or an insurable event only needs to happen once and by having an appropriate policy in place a monetary safety net is there to cover losses, damages and costs.

There are in general two types of personal insurance e.g., physical assets and insurable events – under each are various types of insurance cover which will be listed below with a brief description.

PERSONAL INSURANCE - ASSETS

Personal insurance can cover a range of physical assets that an individual and/or family may have. When we look at physical assets that can be insured, we look at the following policy types:

• Automobile Insurance: protects you against damage, loss due to an accident or theft of a vehicle and the cost is determined by a combination of an individual’s age, driving experience and history. There are 11 types of motor vehicle insurance i.e., Comprehensive, Liability, Collison, Uninsured / Underinsured motorist, Medical / Personal injury, Gap, Classic Car, Towing / Labor, Rental reimbursement. It may be possible to discount the cost by bundling policies and / or having a deductible amount applied.
  
  
• House and Content Insurance: generally known as Home Owners Insurance (HOI) will usually combine the damage to or destruction of your home and the loss or theft of your personal property with-in the home. HOI can be customized to the needs / requirements of the insured home and its content. There are 3 types of cover available i.e., replacement cost, cash value and a combination of both.
  
  
• Electronics and Appliances Insurance: covers a wide range of electrical items in the home i.e., kitchen appliances to home office equipment including home entertainment devices and electronics used for educational purposes.
  
  
• Pet Insurance: this insurance policy will basically cover your pet for wellness (check-ups, vaccines, and routine care), illness and accident or a combination of these 3. Most plans will not cover pre-existing conditions.
  
  
• Jewelry Insurance: with this insurance you’re looking at cash value, replacement cost and repairs. With replacement cost being the best value. Keeping receipts for each asset is important when making a claim.
  
  
• Antiques and Collectibles Insurance: will more than likely need to be covered separately from HOI as it will either limit the amount insured or exclude coverage all together. The most important element of this insurance is getting the assets appraised / valued by a reputable certified appraiser / valuer who is recognized by the insurer.
  
  
• Travel Insurance: works by providing you with cover that can vary from accidents, lost property, theft, cancellations and most importantly emergency medical assistance.
  
  
• Recreational Vehicle Insurance: with this insurance you are insuring boats, any water craft, off-road vehicles, motor homes, travel trailers and 5th wheel vehicles.

PERSONAL INSURANCE - EVENTS

With personal events insurance there is a broad range of policies’ available as listed below:

• Life Insurance: provides a payment to designated beneficiaries upon the death of the insured individual. The amount of the payment can vary depending on the type of life insurance policy taken and the agreed upon sum assured. Below is a list of the types of life insurance generally available.

• Term Insurance: provides death cover for a specific period of time with a fixed / level premium to be paid during that period and a fixed sum assured. Some policies will offer a decreasing sum assured whilst others will offer increasing sums assured including the option to convert to permanent insurance which has no expiration and usually includes a saving option along with the death benefit.

• Whole of Life: is also called straight / ordinary life and is also known as permanent / traditional life insurance. This policy is guaranteed to remain in force so long as premiums are paid and the individual insured remains alive. Another element is the savings component of this policy which allows the insured to partially withdraw a sum in cash or to borrow against the cash component of the policy. There are also tax benefits to this type of policy and it is also known as an Insurance Bond in some countries and provides for premiums / payments to be placed into a unit linked investment fund.

• Endowment: is a policy that can be considered a saving plan that provides for fixed payment and a guaranteed sum assured to be paid out at a pre-determined time or upon the death of the insured whichever comes first. Another feature of an endowment policy is the option to participate in profits or to have it unit linked to investment funds. There are different types of endowment policies i.e. with-profits endowments, low-cost endowments, low-start endowments, unit-linked endowments, guaranteed bonds (single premium endowments), guaranteed income or growth bond. The popularity for endowment policies has waned over the years in some countries.

• Universal Life (UL): is another permanent life insurance policy that is considered to be the most flexible as it provides for flexibility in premium payments with adjustable death benefits along with a cash component which can be borrowed against or used to pay premiums. Premiums have 2 components e.g.; 1 part represents the cost of insurance and the 2nd part is the savings component which represents the cash value accumulated with interest paid set by the insurance company. The one disadvantage of this type of policy is that the cost of insurance (premium payments) will go up over time as the insured ages. There are certain tax benefits attached to this type of policy and tend to work on a tax-deferred basis.

• Variable Universal Life (UVL): is the type of policy that provides for the potential to see growth in the cash component as it can be invested in unit linked investment funds. The significant difference between UVL and UL policies is that the cash component is placed in a separately managed accounts known as sub-accounts, with the death benefit being in its own account. With a VUL policy premium payments for the death benefit and administration costs can be paid out of the cash components the underlying investments from the unit linked investment funds. Should the invested funds incur sustained significant losses premium payments may go up to cover the costs of insurance and rebuild the cash value.

• Insurance riders: riders can provide additional benefits to a life insurance policy and cover such events as accidental and accelerate death benefits; wavier and return of premiums; family income benefit and guaranteed insurability; child term and long-term care.

• Trauma / Critical Illness Insurance: this type of policy covers some cancers, various heart conditions including stroke and other terminal illnesses and conditions. It pays out a lump sum that can be used to pay medical expenses including nursing care, therapy, pay off debts, make adjustments / renovations to a home or vehicle or provide a cash buffer. This type of policy will generally not cover mental health conditions and may have some tax benefits when paid out.

• Total and Permanent Disability Insurance (TPD): this policy pays out a lump sum and covers total and permanent disability as defined specifically in the policy terms which generally means the inability to return to work. It is important that the definition covers your own occupation to get the best possible cover. In some countries TPD cover is provided as a part of a superannuation plan and is very general in its definition as to what is considered an occupation and may not cover a claim where any occupation can be taken up by the insured.

• Disability Insurance (DL): is a replacement income policy that will pay a monthly amount based on a percentage of your salary due to illness or injury. This type of policy cover can pay out for a period set from 3 months to 5 years or longer and activation of the policy can be dependent on the covered period. The cost of the premium can be based on a percentage of a yearly salary. This policy will generally not cover medical and long-term care costs.

• Personal Liability Insurance: this insurance covers events in which an accident occurs in or out of a person’s home that result in injury or damage. It is also known as Comprehensive Personal Lability (CPL) insurance and can be part of an HOI policy and is also considered 3rd party insurance. In essence personal liability insurance covers claims for liability due to bodily injury or property damage that are related to personal activities. This cover does not cover mishaps to you but mishaps to other people that you inadvertently caused by you or you could be held responsible for.

• Umbrella Insurance: this is a type of personal liability insurance that is represented by larger sum assured on top of a standard personal liability policy and becomes activated once the standard policy has been fully utilized. Such a policy is usually put in place when there are considerable assets or potential liabilities due to dangerous activities or events.

• Health Insurance (HI): there are 2 types of health insurance i.e., public through the government and private through the market or the employer. HI will generally cover medical, doctor, hospital, prescription drugs and wellness plans but will not cover, in most cases, cosmetic or elective procedures or treatments, unapproved drugs and their un-approved use including unapproved medical products or services.

• Income Protection Insurance: is also know as redundancy or unemployment cover. Whilst most income protection policies provide cover as a result of being made redundant it is possible to get more comprehensive cover to include accident or sickness which results in unemployment. This normally includes a waiting period and will cover only a specific set time of anywhere from a few months up to 24 months and provide cover that can vary and include specifically mortgage, loan and credit card payments as well as a percentage of a salary to be replaced.

The relevance of insurance is covered further in Module 2  "Structure" and will provide further insight into how insurance cover is relevant to a financial advice and its significance in protecting potential financial outcomes.

IMPORTANT NOTE: it is important to keep in mind that in all cases there is a need to keep receipts for assets insured and where needed appraised / valued prior to being insured. To reduce premiums / payments for any given insurance policy it is possible, in most cases, to negotiate an excess in which the insured will pay a fixed sum before the insurance policies cover comes into effect or activated. Another way to reduce premiums / payments would be to exclude certain types of cover with-in a policy where it is determined that such cover is not relevant to the person or asset insured or the occurrence of an event. In most cases premiums can be tax-deductible or benefits tax-free or tax-deferred. Whilst every effort has been made to provide information on the various types of insurance policies available it is essential to discuss the appropriateness of any insurance cover sought with a licensed / registered professional.

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