Determining the correct level of insurance coverage

Michael Browne explains the cost of debilitating injuries, and how the right level of insurance can save a lot of heartache.

What is the right level of insurance cover?

It’s an interesting dilemma and one that can invoke much debate.

Underinsurance is an issue well known to advisers and insurers. The problem is, there are many people who have life insurance but still will not be adequately covered should the worst happen.

The issue of underinsurance comes into play with living type insurances such as total and permanent disability (TPD) and trauma, where a claim can have many outcomes.

Let’s look at two scenarios: Two men, each 42 years of age, with no income protection insurance other than their employer sick leave, suffer a heart attack.

Man one has a mild case and is off work for a matter of weeks and recovers extremely well. He has trauma cover and receives the full payout of $500,000.

The second man suffers a severe heart attack. He has the same sum insured and receives the same payout.

However, this claimant subsequently has a series of related health issues, a string of medical bills, ongoing treatment to fund and is unable to ever return to work.

He has effectively retired at 42 but with a life expectancy of many more years, albeit in bad health.

The original payout is not enough to cover his costs and change in lifestyle and his super balance is insufficient to provide an appropriate future income stream.

Typically, when an adviser looks at a starting cover level they consider current and future financial needs such as clearing debts, creating alternative income streams and covering expenses.

However, the additional and hidden costs of sickness and injury associated with degenerative conditions such as paralysis and strokes are sometimes not fully considered.

As a result, clients facing these worst-case scenarios may not fully appreciate the need for access to a large sum of money to undergo treatment and adjust to their different lifestyle.

The typical individual who suffers a traumatic brain injury will personally cover up to 65 per cent of costs even after government and private health insurance support.

When considering the extra costs associated with a serious claim, it is important for your clients to consider:

• how much they may need to cover the costs of quality treatment, ongoing care and rehabilitation;
• who will be their primary care-giver? If this is their partner or spouse, what costs or lost income are involved?; and
• the cost of supportive equipment and modifications to their home and/or transport.

Some of these may be one off costs while others may be ongoing costs.

Spinal cord injury

By way of example, here are some facts to consider regarding the potential extra hidden costs involved with a spinal cord injury (SCI).

Being aware of these expenses and, importantly, making your clients aware of such expenses will help more people to become fully insured for worst-case scenarios.

SCI is damage to the spinal cord that results in a loss of function, such as mobility or sensation.

Frequent causes of spinal damage are trauma, such as car and diving accidents, or disease, including tumours, compression of the spinal vertebrae, viral infections causing paralysis and multiple sclerosis and transverse myelitis.

As the loss of mobility is generally permanent, the costs associated with SCI tend to have a long-term impact. See table 1 for a quick checklist of things to consider and some estimated costs over a period of 10 years.

If your clients are likely to find it difficult to cover these costs on their own, this is where TPD, trauma or a lump sum option in their income protection can provide funding to assist with such costs.

Michael Browne is head of marketing at CommInsure.