Ensure you don’t get a dodgy life policy

Insurance is a major tool in your financial welfare

By Noel Whittaker   Sunday Times  23 September 2018

The royal commission into the financial services industry has moved from banks to insurance and has highlighted cold-calling and selling dud policies.

This is not a new practice.

I have been warning people for years that it’s a basic financial principle to hang up the moment anybody rings you to try to sell you a financial product.

But insurance is a major tool in your financial welfare, so let’s examine three policy types.

Income protection

This insurance is to keep you going 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 super. The proceeds of any claim are taxable.

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.

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 allowed to pay out where the member has ceased, or temporarily ceased, employment due to injury or illness.

Total and permanent disability

The words “total and permanent” mean exactly what they say, and the fact that you are let go from 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.

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 includes an own occupation clause the claim would be denied.

Here is the killer: many people tick the TPD box when arranging insurance through superannuation, and think they are covered.

But in 2014, legislation was passed making it illegal for TPD insurance taken out within superannuation to have an own occupation clause.

The purpose of this was to prevent insurance payments being trapped inside super until retirement.

Therefore, if you need occupation-specific TPD insurance you must set it up outside of superannuation.


This insurance pays you a contracted sum on diagnosis of a serious illness. 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 get a serious illness and successfully claim 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 financial product.

Life Brokers – Steve Blizard is a Life Broker with InvestWest Life Brokerage.   Email Steve for a review of your insurance situation.  steve@blizard.com.au



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