Originally written by Andrew Zbik 16th July 2020. Updated 5th March 2025.
“You can’t trust insurers … they never pay.”
“Advisers only want to talk about insurance because they earn a commission.”
“I don’t need insurance.”
“Insurance is a hoax.”
These are common comments heard from clients when discussing insurance and the role it plays in protecting their wealth.
As a Financial Adviser, I see insurance is a strategy to protect your largest income producing asset – yourself.
Let’s work on dispelling some of the above myths.
1) You can trust insurers
The Australian Prudential Regulation Authority (APRA) produces an annual report. It discloses how many insurance claims are finalised by insurers for each type of insurance policy. As seen in the table below, most types of insurance claims received by insurers where an individual has been advised are finalised 84% to 97% of the time. This means the insurer is paying the benefit! Hopefully, raw data like this helps to give confidence that insurance companies do honour their commitment to pay a benefit on a genuine claim.
Claims outcome by cover type (Source: APRA)
DII = Disability Income Insurance.
CCI = Consumer Credit Insurance
2) Find an Adviser who recommends insurance as a strategy – not a product flog
When you speak with an adviser you will get a feel as to whether the Adviser is acting in your best interests. If you are asking questions on how to plan for retirement or save for your children’s education and the Adviser only talks about insurances, be cautious.
Good Financial Advisers will listen to your needs and explain how insurance is a strategy which helps to protect your income.
Better still, there are more and more Advisers who will rebate or reduce insurance commissions to zero. This means that you will pay a higher strategy fee or ongoing service fee. However, when you are paying for a service directly, you can have confidence that the service provided is working in your interests.
Since 2012, we have rebated insurance commissions to our clients. This has meant that under a pure-fee-for service model, an alternative insurance provider can be considered where appropriate. Policies offered by industry super funds that do not pay commissions are an example.
A Financial Adviser still needs payment for what they do. It is better you pay the Adviser directly for advice in your interests, not a product provider paying the Adviser.
3) What type of insurance do I need to consider?
Here is a quick summary of the four main types of insurance policies a Financial Adviser may consider and recommend to you.
Insurance Type | Explanation (Source: ASIC Moneysmart) | Tax deductibility |
Life insurance | Life cover is one type of cover that falls under the heading 'life insurance'. It may also be known as 'term life insurance' or 'death cover'.
Life cover pays a set amount of money when you die. The money will go to the people you nominate as beneficiaries on your policy. If you have not named someone on your policy, then a Trustee or your estate will decide where the money goes. | Tax offset in superannuation.
Not tax-deductible if paid personally.
Benefit usually not taxed* |
Total & permanent disability | Total and permanent disability (TPD) insurance provides cover if you are totally and permanently disabled. It helps cover the costs of rehabilitation, debt repayments and the future cost of living.
Your insurer will define TPD as either when you: (1) cannot work again in any occupation, or (2) cannot work in your usual occupation. | Tax offset in superannuation.
Not tax-deductible if paid personally.
Benefit usually not taxed* |
Income Protection | Income protection insurance replaces the income lost through your inability to work due to injury or sickness. It is especially suitable for self-employed people, small business owners or professionals whose business relies heavily on their ability to work. | Tax offset in superannuation.
Tax-deductible at your marginal tax rate if paid personally.
|
Trauma or Critical Illness | · Trauma insurance provides cover if you are diagnosed with a specified illness. These policies include the major illnesses that will make a significant impact on your life, such as cancer or a stroke. Trauma insurance pays a set amount. This can be used for things like any private medical costs above your health insurance; · an income stream if you stop working; · the ongoing cost of any therapy and special transport costs; · adjustments to housing; · repaying your debts. | Cannot be held inside superannuation.
Premiums are not tax-deductible.
Benefits are tax free. |
* Depending on superannuation beneficiary, some tax may be payable. You will need to seek advice from a Financial Adviser for individual circumstances. (That is another long blog).
Summary
When you speak with most people, they will insure their house, insure their car, insure their boat or even their smartphone. Your ability to sell your time for money may be your largest income producing asset over your working career. It makes sense to ensure you have the right protection in place to maintain your lifestyle in the event of short-term medical incapacity or long-term total and permanent disability.
SOURCES