How to hunt zombie insurance policies

The recent Productivity Commission report into superannuation coined a new term, “zombie insurance”. Unfamiliar to most, how do you know if you’ve got it and how do you get rid of it?

Insurance that you pay for but will never pay out if you claim is called a “zombie policy”.

Here are some examples:

Multiple income protection policies

Generally the maximum insurable amount for income protection, also known as salary continuance, is 75 per cent of your regular employment income. If you have policies that insure for more than this level, you will never be able to claim the increment above 75 per cent even if you have paid all your premiums and you meet the relevant medical criteria. Exceeding the maximum insurable amount occurs most often with multiple superannuation accounts and in the event of a claim, the insurers within the respective funds will offset the benefit payments to ensure that they do not collectively exceed 75 per cent of income. One of the advantages of consolidating your super is ensuring that your retirement benefits are not eroded by income protection policies upon which you could never claim.

Income protection while not working

Temporarily ceasing work, for example being made redundant or taking parental leave, can affect your insurances. Many policies require paid employment at the time of illness or injury as a pre-condition of claim. While some policies provide a grace period, say 12 months of not working, most of us are unaware of the requirements of our particular policies. It might absolutely be a valid choice to retain coverage while not working to obviate the need to reapply and avoid the risk that cover is denied as a result of changed health. However, it is essential that this is a conscious, fully informed choice, not a costly default.

Indemnity v agreed endorsed value

When applying for income protection cover, you can opt for agreed endorsed cover, providing the insurer with sufficient evidence to validate your desired level of cover, up to the maximum insurable amount. This means that there will be no financial assessment at the time of claim and the agreed benefit will be paid. The alternative is indemnity cover, common to many default policies within super. Premiums can be a bit cheaper than agreed cover and there are fewer hurdles at the time of application. However, you must substantiate your income at the point of claim, which can be difficult and distressing when you are ill or injured. In addition, if your earnings have declined since the indemnity cover commenced, you may not be able to claim on the full amount upon which you have been paying premiums.

The reality is that most Australians remain underinsured, spending more on insuring our cars than our most important asset – our ability to earn. Understanding your unique insurance needs and paying for an appropriate package of cover is one of the most life-changing gifts you can give yourself and those you love. Chopping the head off zombie policies that confer no benefit, redirecting the savings to more effective cover or to augmenting your long-term retirement savings is absolutely worth the effort.

Article by Catherine Robson. Published by The Sydney Morning Herald, September 30, 2018.