It’s time to explain some commonly used life insurance terms, which will help you understand your Product Disclosure Statement and policy document better.
Accelerated death benefit: An accelerated death benefit provides for the payment of a portion of your life insurance proceed if you become terminally ill. To be eligible to receive the benefit, you must be diagnosed as being terminally ill with a life expectancy of 12 months or less. The maximum benefit is usually 75 percent of the member's existing life insurance. An accelerated death benefit does not usually apply to term life insurance.
Accident Only Cover: this type of cover only insures you in the event of an accident e.g. cancer would not be covered.
Annuity: A contract which provides an income for a specified period of time, such as a certain number of years or for life. An annuity is like a life insurance policy in reverse. The purchaser gives the life insurance company a lump sum of money and the life insurance company pays the purchaser a regular income, usually monthly.
Any Occupation: An "any occupation" policy defines disability as the inability to perform the duties of any occupation. This definition of disability is strict. To receive benefits according to this definition, you have to be unable to work in any occupation, not just your own. Occasionally, however, the wording is modified to take into consideration your earning level, education, training, and experience.
Agreed Value: (guaranteed or endorsed) is an agreed amount of monthly benefit on your income protection policy, similar to when you insure your car for an agreed amount.
Benefit Period: is the maximum period of time your income protection policy will pay you for e.g. 2 years or to age 65.
Cash value: Relates to a whole life policy, where it builds up a cash value, and can be cashed in or borrowed against for that cash amount as the policy grows.
Critical illness (Trauma) cover: is a defined event policy, covering critical illnesses such as cancer, heart attacks and stroke. Some of these policies have an extensive list of conditions covered so it’s worth your while comparing as they do slightly differ from policy to policy
Duty of Disclosure: when you complete an insurance application you are required to answer all questions truthfully and disclose every matter you know about your health, occupation, sport activities and income. If you fail to comply, you may be denied at claim time, where, for example, the insurer writes to your doctor or Medicare to obtain your health history.
Exclusion: your insurer may apply an exclusion to your policy for a particular pre-existing medical condition, such as a back complaint, or a particular hazardous sport/activity you regularly undertake. This means you will not be covered if you become injured, sick or die as a result of the specific excluded condition or event.
Family income benefit: With a family income benefit, instead of being paid in one lump sum, your beneficiaries will be paid with a tax free annual income until the end of the term specified in the policy.
Financial Planner: means someone who is a licensed adviser and holds an authorised representative number of an Australian Financial Services Licensee.
Guaranteed Future Insurability: is an option to increase your sum insured without having to provide health evidence or go through an underwriting process. Usually this option becomes available when a pre-defined event occurs, such as marriage, the birth of a child or an increase in your mortgage.
Guaranteed renewable: the policy cannot be cancelled so long as you pay your premiums, even if you develop a medical condition after you take out a policy. However the premium can be raised under certain circumstances, primarily due to age increases and not as a result of any new medical conditions that develop after the policy is taken out.
Income Protection: is cover designed to replace a percentage of your income or a fixed agreed amount when you cannot work due to a illness, accident or injury. It does not cover you in the event of unemployment, which is a common misconception about this product. Some policies also cover you if you can only work in a reduced capacity e.g. part-time while you are recouping.
Increasing Claim Payment: simply offers a “pay rise” each year in line with CPI when you are on claim. This is generally an extra cost option.
Indemnity: means you will have to prove your income at claim time, a bit like market value on your car insurance.
Level Premium: the premium is calculated and based on your age at the start of the policy. The premium for any increase in the sum insured or income protection monthly benefit is calculated at the start date of the increase, based on your age at that time.
Mortgage protection insurance: Mortgage protection insurance is an insurance policy that will cover either the whole repayment of your mortgage or just a portion of it.
Non-cancellable: the policy cannot be cancelled and the premium can not be increased for the life of the policy as long as you continue to pay your premiums.
Occupation Category: grouping together occupations with similar duties and risk levels.
Own Occupation: Although the terminology used to define disability varies from policy to policy, an "own occupation" policy generally defines disability as the inability to perform the usual and customary duties of one's own occupation. This is a liberal definition of disability, because even if you have the ability to work in another occupation but choose not to, you still receive disability benefits.
Premium Loading: an insurer may offer you terms asking you to pay a higher price due to a heightened risk factor you present, such as a pre-existing medical condition or other health factors. Usually a loading allows you to be covered for such pre-existing conditions, rather than having them excluded from the policy. See “Exclusion”.
Stepped Premium: the premium will be recalculated (and will usually increase) on each policy anniversary based on your age at that time.
Term Life Insurance or Death Cover: covers you in the event of death or, in the case where a policy contains and accelerated death or terminal illness benefit, being diagnosed with terminal illness with less than 12 months to live. Beware some death cover within superannuation may not have accelerated death or terminal illness benefits.
Terminal illness benefit: See Accelerated Death Benefit
Total and permanent disability (TPD): Total and Permanent Disability Insurance (TPD) provides a lump sum payment if you’re totally and permanently disabled. Depending on your policy, you are covered if you can’t work again in ‘any occupation’, or can’t work in your ‘own occupation’ (your usual occupation or chosen field of employment).
Trauma/Critical Illness Insurance is a defined event policy, covering critical illnesses such as cancer, heart attacks and stroke. Some of these policies have an extensive list of conditions covered so it’s worth your while comparing as they do slightly differ from policy to policy.
Waiting Period: is the chosen number days you must be off work before your income protection claim starts. Most insurers pay claims monthly in arrears so if you chose a 30 day waiting period for example, your first claim cheque may not come through until day 60.
Waiver of premium: A waiver of premium covers the cost of your insurance premiums during periods of ill health and/or unemployment.
Underwriting: the process where an insurer assesses your application for insurance cover. They will look at a range of factors, including your current health and past medical history, occupation, activities and income. The underwriter may accept you at standard rates, offer you special terms or decline cover.
Whole of life: A whole of life policy is a life insurance policy that provides a lump sum death benefit and also builds a cash value.