CHAPTER 15
Income Protection, Health and
General Insurance
OVERVIEW
A range of benefits is available to those who become disabled and are unable to earn
an income.
Full protection needs insurance and a wide variety of policies is available.
Business people also need business expenses to be covered if disability strikes
unexpectedly.
Medical bills can be extremely high and are met from the government or private health
insurance.
A range of general insurance products provide protection in the areas of homes and
contents, personal property, legal liability, motor vehicles, compulsory third party, flood
and professional indemnity.
Reluctance to Insure
• Many people recognise the value of their homes
and seek to have them insured.
• The home is usually the most valuable possession:
should it be destroyed, most people would have
great difficulty replacing it. Yet these same people
fail to recognise an even more valuable asset, one
which they are unlikely to be able to replace, and
that is their ability to earn an income.
• Additionally an individual’s health is of paramount
importance and hence insurance provides a risk
management strategy in this area.
Risk Identification
The range of disabling events that can impair
ability to earn income is quite extensive and can
extend from a heavy cold that keeps a person
from work for several days to a person being
totally disabled with a serious illness or accident
and unable to work for months or even unable to
work ever again.
Risk Identification
• The period of disablement arising from these
events can vary considerably from a short period
of time to permanent.
• Regardless of the period, the costs arising can be
considerable and include:
– medical expenses;
– equipment and aids to assist in coping with disability,
for example motorised wheelchairs, house alterations
(ramps, rails, widening doorways)
– nursing assistance; and
– loss of income.
Funding Needs
Different levels of disability will impose
different funding burdens when income
stops, depending on:
1.The duration of the period of disability
2.The cost of medical interventions
3.The availability of sick leave
Funding Sources
The possible sources of funds are:
•
•
•
•
sick leave entitlements
workers’ compensation benefits
compulsory third party benefits
social security benefits.
Insurance policies
There are a number of insurance policies and
government assistance that could help meet
costs during periods of disablement. These
are:
• total and permanent disablement (TPD)
policies;
• trauma policies;
• income protection insurance;
• business overheads insurance;
• Medicare; and
• private health insurance.
TPD and Trauma Policies
• TPD policies pay a lump sum for those whose
disabilities are total (cannot work) and
permanent (never will work again).
• Trauma policies will pay a lump sum amount
on the occurrence of a specified event
(trauma).
• Disabling events will result in medical
expenses.
• There are different levels of cover that can be
effected.
Income Protection Insurance
• Providing protection for loss of income is a
major and essential item and can be achieved
with an income protection policy.
• Such policies are designed to replace, in part,
the insured’s income while the insured is
totally disabled (but not necessarily
permanently). The payment of the benefit
commences following a waiting period and
continues until the insured is no longer totally
disabled or the benefit period expires.
Income Protection Insurance
• Policies can be extended to include partial disablement
for an additional premium.
• There are a range of additional covers available in these
policies: some of these are included at no extra charge
and others incur an additional premium if nominated.
• Policies vary in their definitions of ‘injury’ or ‘sickness’.
Some do not define the terms at all and where this is
the case the common usage or dictionary definition
would be used in interpreting the policy.
• Note that the word ‘accidental’ excludes self-inflicted
injuries.
Income
• An income protection policy will also define
what constitutes ‘income’, which will vary
between employed and self-employed people.
• Employed
– the total remuneration package: salary, fees,
commissions, regular bonuses, regular overtime,
superannuation and fringe benefits. (Sometimes
only salary sacrifice superannuation is included.)
• Self-employed
– the income earned by way of ‘personal exertion’,
less expenses incurred in earning that income.
Benefit
• The benefit paid under the policy is usually a
stipulated monthly amount which is related to the
insured’s ‘income’ (see discussion of ‘income’
below) at the time the policy was effected.
• The insurer will usually provide cover for up to
75% of the insured’s pre-disability income. This
margin is set to provide an incentive for the
insured to return to work.
• Some insurers are prepared to provide cover for a
further 10–15% of pre-disability income provided
the additional amount is used for meeting
superannuation contributions.
Qualifying Period
• The ‘qualifying’ (or ‘waiting’) period is a
period at the start of the incapacity, during
which the insured has elected that no
benefit shall be paid under the income
protection policy.
• Incapacities of a short duration can occur
frequently and if insurers were to provide
compensation for incapacities of just a few
days the premiums they would need to
charge would be very high.
Qualifying Period
• The length of the qualifying period commonly
offered by insurers is 14, 30, 60 or 90 days.
• Some insurers will provide qualifying periods
of six months and one year or even two years.
• Longer waiting periods result in fewer claims
and cheaper premiums. There is a dramatic
drop in the premium where the waiting period
is increased from 14 to 60 days.
Benefit Period
The insured selects the maximum period
of time that a benefit is payable for when
effecting the policy. Benefit periods
offered by insurers are one, two, five
years or to age 65. For some professional
occupations, lifetime cover may be
offered.
Business Overheads Insurance
Where a person operates their own
business a significant incapacity can
seriously impair the business. The
business income, in addition to
providing an income for the selfemployed person, meets the costs of
the business.
Business Overheads Insurance
A decrease or suspension of business income
means that the continuing business expenses
cannot be met.
Items such as commission will cease to arise
where there are no sales made, but fixed
costs such as rent, phone rental, lease
payments on leased equipment and similar
expenses will continue. This gap can be filled
by the business overheads policy.
Business Overheads Insurance
The expenses covered are listed in the policy
and an example might include:
– ‘Depreciation, land and payroll taxes and rates,
interest on business loans and mortgages,
electricity, gas, water rates, insurance
premiums, cleaning, heating, phone costs, lease
payments for equipment and vehicles,
professional subscriptions, salaries of
employees who do not directly contribute to the
earnings of the business, other fixed costs
normal to the conduct of the insured’s
business.’
Business Overheads Insurance
•
•
•
•
•
•
The policy will also contain a list of expenses
that are not covered and the following list is
typical:
goods, merchandise or stock in trade
depreciation on real estate
remuneration of those who directly
contribute to the earnings of the business
remuneration paid to family members
expenses not regularly paid by the business
business taxes.
Health Insurance
• Hospital and medical insurance in
Australia is provided by way of two
systems:
• Public: Medicare
• Private: Private health funds
Medicare
• Medicare is a federal government scheme.
It is available to everyone and is funded partly
from government revenue and partly from a levy
made on the income of all taxpayers except low
income earners.
• The current levy is 1.5% on taxable income and is
paid along with income tax.
• Where a person’s income is over $50,000
(or $100,000 for a couple) and they have no
private health insurance the amount of the levy
rises to 2.5%.
Medicare
• Medicare provides treatment in a public hospital
at no charge by a doctor appointed by the
hospital. You cannot choose your own doctor.
• For a private patient, Medicare will pay 75% of
the scheduled fee for the treatment provided.
Bear in mind that the actual charge may be
greater than the scheduled fee.
• For medical expenses incurred outside a hospital,
Medicare will reimburse 85% of the scheduled
fee.
Medicare
Medical benefits
Medicare covers a variety of medical services:
–
–
–
–
–
–
–
–
doctor’s and specialist’s consultations
anaesthetics
obstetrics
radiology
X rays, pathology tests and other similar tests
optometry
surgical procedures approved by dentists
certain cleft lip and palate procedure.
Medicare
Hospital Benefits
The cover provided by Medicare applies in both
public and private hospitals, but the extent of
cover differs as to whether the person is a private
or public patient.
Public hospital
• Medicare allows a public patient to receive
treatment, in most cases at no cost, from a doctor
or specialist provided by the hospital.
• A private patient in a public hospital is treated the
same as a private patient in a private hospital.
Medicare
Private hospital
• A private patient must meet the cost of
their hospital accommodation, and
medical and related expenses, but they
have their choice of doctors and
specialists. They can insure these costs
under private health insurance.
Restrictions on Medicare
•
•
•
•
There are a number of services Medicare
does not cover. Briefly the principal items are:
Hearing aids and dental care
Ambulance services
Home nursing
Costs incurred as a private patient. These can
be incurred in a public hospital where the
patient has elected to be admitted as a
private patient. In such a case they would be
able to choose their own doctor.
Restrictions on Medicare
•
•
•
•
•
Physiotherapy, speech and occupational therapy
Chiropody, psychology and chiropractic services
Osteopathy
Prostheses costs
Treatment provided as part of a workers’
compensation or compulsory third party
insurance
• Life insurance or superannuation examination
Other Government Assistance
In additional to Medicare, the
Pharmaceutical Benefits Scheme assists
with medical expenses by meeting part of
the cost of most prescriptions purchased
from pharmacies.
Private Health Insurance
Private health services allow the patient a
greater choice and flexibility
Private patients can choose their own doctor and
have more control over when they are admitted
to hospital. Costs are met by the patient or their
insurer for items such as:
hospital accommodation, theatre fees, intensive
care, drugs, dressings and similar, surgically
implanted prostheses, diagnostic tests,
pharmaceuticals and doctors services
These costs can be substantial and private health
insurance is designed to assist with paying them.
Government Initiatives
In recent years the private health insurance
industry has undergone something of a crisis with
the number of people privately insured dropping
to very low levels, below 30% of the population
A number of measures have been introduced in
an attempt to address this problem, including:
– the Medicare levy surcharge
– 30% Rebate on Private Health Insurance
– the Lifetime Health Cover Initiative.
The Medicare Levy Surcharge
The surcharge was aimed at encouraging
high income earners to take out private
hospital cover. An extra 1% surcharge is
applied to the Medicare levy making it a
total of 2.5% for high income earners who
do not have an appropriate level of
hospital insurance.
Federal Government 30% Rebate on Private
Health Insurance
• This initiative was introduced in January 1999 and it
provides a rebate of 30% of a person’s health
insurance premium.
This rebate can be claimed by:
• The health fund reducing the premium by 30%. The
government reimburses the fund for this amount.
• A direct payment from government through the local
Medicare office.
• Claiming the 30% back on the person’s tax return.
The Lifetime Health Cover Initiative
• This initiative is aimed at encouraging
people to take out cover at a younger age
and maintain the cover throughout their
lifetime
• The initiative increases the premium
payable by 2% for each year after 30 a
person is when they take out the cover.
Membership Categories
Not all funds provide all of these categories
• Single - Cover for the applicant only
• Family - Cover for the applicant, one other adult
and all dependent children
• Couple - Cover for the applicant and another
person who is not a dependent child of the
applicant
• Single parent family - Cover for the applicant and
any dependent children
A dependent child is one who is under 18 (or
under 25 if a full-time student).
Health Insurance Benefits
The amount of benefit received will
depend on the type of cover purchased
and the benefit level paid for within that
cover. In some cases the fund may have
an agreement with the hospital or the
doctor in which case the fund may cover
all costs.
Types of Cover
There are two types of cover provided by private health
insurance. These are:
• Hospital cover
– Reimburses the costs of hospital and medical expenses
• Ancillary cover
– Reimburses a range of non-hospital charges, such as
physiotherapy, podiatry, glasses and contact lenses, and
home nursing
General Insurance
House and contents insurance
• Indemnity value
– Covers the market value of the property at the time of
the loss, and takes into account depreciation.
Indemnity value might not provide enough money to
replace the property.
• Replacement value
– ‘new for old’ policies which enable full replacement.
General Insurance
Contribution, subrogation and co-insurance
• Contribution
– Where insurance is held with more than one company over the
same asset, each is obliged to pay only a part of the claim in
proportion to the amount of cover they are sharing.
• Subrogation
– When the client has a right to recover from a third party as well
as to make an insurance claim, the right to sue is transferred, as
a contractual term of the policy, to the insurance company.
General Insurance
Contribution, subrogation and co-insurance
Co-insurance
– Where an insured person does not insure for the full value, they
are deemed to be self-insuring part of the property. Only part of
even a small claim will be met by the insurance company.
Co-insurance clauses have proven to be very unpopular and
many insurance companies either no longer include them
or do not enforce them.
General Insurance
Sums insured
When calculating the full sum insured for a
house, the following items must be included:
–
–
–
–
cost to rebuild the house
costs of other buildings, sheds, garage
cost of fences, swimming pools and other structures
architect fees, demolition fees and debris removal.
General Insurance
Contents insurance
It is advisable to list contents with new for old values in
advance to avoid disputes in the event of a serious loss.
Portable property, such as cameras, watches and
jewellery, may have valuation limits and special
conditions attached to them.
General Insurance
Scope of insurance
Two main types:
1. Everything covered except items listed as exclusions.
2. Everything excluded except items listed as included.
The former provides greater certainty about what
is covered for the policy holder.
General Insurance
Exclusions
House and content policies cover fire, explosion,
lightning, earthquake, wind, rain, hail and snow.
Policies generally do not cover gradual deterioration,
water entering the house because of building defects
or open windows, flood, landslides, subsidence or
erosion.
General Insurance
Personal Property Insurance
Covers accidental loss or damage to personal property
anywhere in Australia.
Legal Liability Insurance
Extent of the cover will vary between policies and may be
restricted to the premises or operate Australia wide.
General Insurance
Personal Property Insurance
Covers accidental loss or damage to personal property
anywhere in Australia.
Legal Liability Insurance
Extent of the cover will vary between policies and may be
restricted to the premises or operate Australia wide.
General Insurance
Motor Vehicle Insurance
• Compulsory third party
– Covers the driver against bodily injury to third parties as a result of his or her
use of the vehicle.
• Full comprehensive
– Covers damage to the vehicle itself and property damage to third parties.
• Third party fire and theft
– No cover for the vehicle itself unless caused by fire or theft, but cover for
property damage to third parties in accidents.
General Insurance
Other insurances
• Flood
– A difficult area to underwrite, because only those at high risk
are interested.
• Professional indemnity
– Provides cover for legal liabilities arising from negligent acts,
errors or omissions. Required by professionals, including
financial planners.
Summary
• A range of benefits is available to those who become disabled and
are unable to earn an income.
• Full protection needs insurance and a wide variety of policies is
available
• Business people also need business expenses to be covered if
disability strikes unexpectedly.
• Medical bills can be extremely high and are met from the
government or private health insurance.
• A range of general insurance products provide protection in the
areas of homes and contents, personal property, legal liability,
motor vehicles, compulsory third party, flood and professional
indemnity.