17 Things You Need to Know
Personal Insurance – where are the costs?
There are many things that make up the cost of insurance, depending on what you are getting covered for. It is not like buying a can of baked beans. Clearly. That said, we don’t think it is some sort of ‘black- art’ that needs to be kept secret from the public, either. At the end of this article you should have a much clearer understanding of the terminology and jargon used, as well as an understanding of the building blocks for your premium There are about as many types of insurance as there are brands of beans, so we’re going to focus, in this article, on what we call “personal risk”.
The 5 key product categories are:
OK, you could argue that this is not the most inspiring line-up for a discussion! But it’s critical that you know what these things are, how they’re priced, and how being covered for any or all of them can make a significant difference to your life.
Below is the list. It’s a snapshot that captures the most commonly considered factors when companies are pricing your insurance:
1. Your age
2. If you smoke
3. Your gender
4. Your BMI (Body Mass Index)
5. Other health issues/pre-existing conditions (these impact loading)
6. Level / YRT (Yearly Renewable Term)
7. Disability Insurance (or DI cover)
- Monthly benefit amount
- Wait Period
- Benefit Term
- Excess Options
- Hospital vs day-to-day cover?
- Life Buyback
10. Accelerated vs Stand Alone
11. Total & Permanent Disability (TPD)
- Own vs Any occupation
12. Occupation Class
13. CPI – Consumer Price Index
14. Insurer’s product cost
15. Multi-benefit, multi-product discounts
16. Kids trauma – Free or not..?
17. Future Insurability – what is it?
We will go expand on these bullet points below.
Some of these pricing building blocks may apply to all insurance products, some will be specific to the product category.
For example, the reinstatement option for Trauma applies to Trauma and not health insurance.
Note: This information is not meant the take the place of a policy document. Also, each insurer may use slightly different terminology. And remember, life insurance discussions inevitably involve facts and stats that some of would prefer not to face. Don’t be put off by our directness here: this is important (It’s your life, after all!) and it’s our job to be clear, direct, and factual. And with all that said, let’s move on: we think this information we’ve gathered up and clarified will really help you when you discuss your protection plans with your financial adviser. And that’s some really good news.
Age is a key factor in price. Statistically, as we get older, more wears out and goes wrong. You’re more likely to have heart issues in your 50s than your 20s. And the longer you stick around, so do you increase your chances of having an accident. It’s just statistics, and it’s not worth arguing with! But it impacts your premium costs.
The health risks to smokers are well known. Smoking drastically shortens your life expectancy and increases your chance of getting a whole raft of health conditions. As these risks increase, the insurance companies want to ‘off-set’ their risk, by charging you a higher rate (or premium) for being a smoker. Interestingly, and worth being aware of, some insurers have adopted a similar view to vaping too.
Men and women are biologically different. (Who knew?!). The point is these differences mean that statistically, different conditions are likely to impact women, and at different times in their lives, than for men. Generally, the pricing on women tends to be higher when they’re younger, and then lower than men in later years.
4). BMI – Body Mass Index
Essentially, this is the ratio between your height and weight. Although it is a far from perfect measure, (a weightlifter, for example, is both large and fit), people with
higher BMI scores are statistically more likely to have issues with diabetes and cardiovascular conditions, and the insurers price accordingly.
5). Loading – Other Health Issues & Pre-existing Conditions
Pricing insurance is definitely not black and white, especially around health. People carry myriad conditions throughout their lives, and these often come and go. An insurer, then, will assess a condition you may have as “borderline” and rather than exclude you on that basis, they will ‘load’ your premium to account for this. This minimizes their risk. Remember, these things can be re-evaluated within a set time period, and loadings can be removed when conditions clear or are managed to a degree the insurers are happy with. And if your condition is ongoing, you’re simply paying a little more to accommodate that.
6). Level / YRT (Yearly Renewable Term)
Most premiums nowadays are set out as YRT, which effectively means that the contract ‘renews’ each year. (Anyone with insurance is familiar with getting their renewal letter in the mail telling about their premium increase.) Even though you may be paying fortnightly or monthly, the agreement you have in place with the insurer is an annual one.
There is another process that is growing in popularity which is known as the Level Premium. An easy way to think of it is like fixing your mortgage repayments (whereby you can request with you bank to pay the same amount each fortnight on your mortgage, irrespective of interest rates changes, for a set period. The Level Premium option works on a similar basis. You can fix the amount you pay for a specified term, usually through to the age of 65 or 70, although some insurers restrict the term to ten years.
As with fixing your mortgage, there are significant cost-savings to the Level Premium process, but there are fishhooks too. Definitely one to talk through with your adviser.
7.1). Disability Insurance (or DI cover) – Monthly Benefit Amount
The amount of cover that you specify is a key factor in your price. This applies for all insurances (except Health and medical, which behave differently), and it’s pretty simple: the more you insure yourself for, the higher the premium.
7.2). Disability Insurance (or DI cover) – Wait Period
A key component of DI cover is how soon you will start receiving payments post our event, known as the “wait” period. Most will start at 4 weeks, but there are typically options like 8/13/26 weeks (and beyond). Essentially, the longer the wait time before you get any payout, the lower the cost to you.
7.3). Disability Insurance (or DI cover) – Benefit Term
The benefit term is how long the insurer will carry on paying you a monthly disability benefit. Generally, the options are 2, 5 years or more, right through to the age of 65.
The longer the term, the more expensive the insurance. It makes sense, really: if the insurance company has to pay you monthly for the next 30 years of your working life, because you have chosen the Age 65 option, this will cost you far more, than if you’d chosen the 2-year option.
Body Mass Index is a simple tool that helps insurance providers.
The index helps the insurance underwriters to assess the ‘risk’ that you might pose them as a policy holder.
A very high (or low) index, may mean that there are underlying health conditions.
8.1). Health – Excess Options
This is where you get some power back! Your excess gives you some future control over your health insurance. It works much the same way as an excess on home/car insurance may have an excess, you can do the same with most modern health covers.
8.2). Health – Hospital or Day-to-day Cover?
We’re getting spoiled for choice now! The type of cover that you have with health
insurance plays a large part how the price is calculated. Generally, day-to-day cover,
such as seeing your GP, prescriptions, or dental & eyewear are in many cases what we call “dollar-swapping”, i.e. paying via premium what you’d spend anyway. Or, to
be a little more direct, it’s like insuring the wingmirror on your car and not the chassis and engine.
Insurance is about covering the risk you cannot ordinarily cover yourself. Most people cannot afford the $20,000 cancer operation, so they’ll buy insurance to cover that. Buying insurance to cover yourself for a $60 trip to the doctor doesn’t make much financial sense.
9.1). Trauma – Life Buy Back
When Trauma cover is accelerated (see the article “What is accelerated… does it go faster?”), you can elect to have the Life Insurance component ‘brought back’ to the sum insured, prior to the trauma claim.
9.2). Trauma – Reinstatement
This is an option whereby after a trauma claim, you can elect to have the Trauma cover reinstated, to have cover again, should you need it in the future. While this is a great option, there are a number of fishhooks with it. Again, speak with your financial adviser to get a good understanding of the limitations with this option.
10.). Accelerated versus Stand Alone
You can have your trauma (or TPD) cover ‘accelerated’ to your life cover (see the blog post on our website, “What is accelerated… does it go faster?”) Essentially
this means that if you make a claim on your trauma, then your Life insured amount
decreases by that amount. The risk then, is that you have less in your life cover should you need it.
Accelerated is an economic method of stacking your insurance to cover your risks while on a budget. Again, oner a conversation with your financial adviser.
11). Total & Permanent Disability (TPD): Own vs Any Occupation
There basically two types of TPD cover. TPD pays a lump sum if you are unable to work. You can opt for this to be applied specifically to in your own occupation, or occupations in general. The second option will be less expensive, but depending on what you do, you may need to opt for the first. There is obviously an assumption here about just how severe your condition is. For you, to be unable to work in any job
whatsoever is obviously a tougher situation than being unfit for your own specific
skillset. Yet from the insurer’s perspective, the “any occupation” option is a lesser
risk. It’s a bit, as they say, complicated!
(See the blog post on our website “TPD – Is that contagious.. ?” for more info this).
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12). Occupation Class
The type of job you do may expose you to greater risks than other lines of work.
Therefore, especially with monthly-paying disability covers, different jobs will attract different rates. You may assume that an arc-welder will be more expensive to insure than a high-level corporate. You may be right; the welder faces dangerous conditions on a daily basis. That said, a CEO will also face higher risks for stress and mental illness days and will therefore attract expense that way.
13). CPI – Consumer Price Index
Also known as inflation, this has the same effect on insurance as it does with other goods and services; they track upwards over time.
14). Underlying Cost Of The Insurer’s Product
Insurers spend a lot of time making sure that they can sustain their ‘book’, which
consists of the clients that make up all the policies that the insurance company looks after. Claims data and ‘pooled product risk’ – the number of claims on a certain product – all contribute to future costs. The more claims, the more financial strain on the ‘book’. In order to keep the book viable for everyone in it, the insurer will review their pricing regularly, adjusting their prices to you, the client, accordingly.
15). Multi-benefit discounts, Multi-product Discounts
It’s a competitive market, so most firms now offer some type of bundled discounts.
They may call it different things, and structure it all slightly differently, but essentially, it’s around customer loyalty: the more you stack with them, the lower your price per product. Some of these discounts can be significant, especially when
you are getting close to or beyond 10-12% discounts on an annual premium.
16). Kids trauma – free of not..?
The are several top-tier insurers who will offer some form of free trauma cover for children, as long as the parents have a certain amount of trauma cover. On top of this, some companies will allow you to purchase additional trauma cover for children.
17). Future Insurability – what is it?
This is another option that can be available with some life insurance policies. Again, the names might be different depending on which firm you deal with, but it effectively offers your a chance to increase your sum insured without needing to be underwritten for the increase. Meaning? Usually, is you want to increase your risk with the insurance company, they want to ask you a load of questions again, to underwrite you.
This Future Insurability Option allows you to increase your cover without needing to answer quite so comprehensively about your changed health situation. Obviously, there are conditions that apply, specific to each provider, but it simplifies things for you. And that, let’s not forget, is what we’re here to deliver! Simplification, and clarification.
These are the 17 things that most influence price in personal insurance. This is by no means an exhaustive list but it should have given you valuable information about the price for insurance and, most importantly, how the different choices you make will affect your final price.
As you can see, there are many variables, depending on your needs, what you want, and how you want your risk protection plan to work. Remember, no one knows what is going to happen in the future. We are simply trying to find the right financial protection if that unexpected event happens to you.
Feel free to speak with us, or your financial adviser, about any of the points we discussed above. The ultimate objective is that you can get the right protection that you need for you and your family, at a price that is right for you.