INSURANCE

Why premium cover is important

Is premium cover the most important product a life and health insurance adviser should recommend? Asks Steve Wright of Partners Life.

Leaving the answer to this question aside for the moment, how does premium cover/waiver of premium feature in your recommendations? Does it feature at all, or do you see it simply as something “insurers insist on” with disability products like income cover or mortgage repayment cover? Does your client understand what premium cover does?

What is premium cover?

Like all products, the name does not necessarily tell you what it actually does, and even when products seem to do the “same job”, they may not do it the same way or as comprehensively.

It takes some research to determine what each product does and does not do (this is a major reason why advisers are valuable to their clients). Premium cover as a product, is typically a disability product: it “pays” (waives) the policy premium if the life insured is disabled (meaning they are unable to work).

The definition of “disabled” under premium cover typically mirrors the definition of disability in income cover or mortgage repayment cover, but it might not – something you should check. Cover that waives premiums when a life insured is disabled is what I want to discuss in this edition of TMM.

What does premium cover do?

Premium cover typically waives policy premiums due for the period while the life insured is disabled or until the end of the premium cover payment term, again typically, age 65 or 70, after a selected waiting period – more stuff for you to check. It is also important to check what premium a particular provider’s premium cover will waive on total or partial disability. For instance, is it:

• the life insured’s income protection or mortgage repayment premiums due only

• the life insured’s premiums for all benefits covered on the policy

• the total policy premium (ie including all benefits for all lives insured on the policy)?

Please also check to see whether or not the premium cover benefit will be apportioned (premiums only partially waived) on partial disability. If it is apportioned, your client will have to pay the remainder of the premium not waived themselves.

‘Some providers do allow premium cover even if a life insured only has life, trauma, or medical insurance on their policy’

Premium cover typically only waives policy premiums on disability if the person disabled is actually covered for premium cover benefits on that policy. Just like any other product, if a life insured on the policy does not also have premium cover over themselves, no benefit (waived premiums) can be paid if they are disabled. Being a disability benefit, it is important to check how premium cover will apply to a life insured who is not employed.

Premium cover typically only covers the premiums of the policy it is included on, not other policies a client might own. If a client has multiple policies, each policy will need premium cover to be selected/ added, to protect its policy premiums.

Can clients who don’t have income cover/mortgage repayment cover on a policy, protect these policies with premium cover?

This depends, mainly on whether or not the provider allows the option or even provides premium cover. Again, this is something for you to check, and consider, when making your recommendations. Some providers do allow premium cover even if a life insured only has life, trauma, or medical insurance on their policy. Some specialist providers do not provide premium cover, which means disabled clients will have to find the money to pay for these premiums themselves.

Why should advisers recommend premium cover?

Clients who are disabled and cannot work, still have an obligation to pay their premiums. Even if the client is receiving monthly disability benefits, why would they want to spend any of this on life and health insurance premiums? It’s tough enough getting by on the reduced income that disability benefits typically pay, so having premiums waived by premium cover is like getting a bigger disability benefit, premium cover effectively increases disposable disability income because it removes a fairly large expense from the disabled client’s budget.

Premium cover that pays life and health insurance premiums when a client is disabled is really “disability insurance for your insurance”. To lose the protection of life and health insurance simply because a client is disabled and can no longer afford the premiums, seems like a disastrous client outcome to me. Especially because now that their health is poor (they are disabled after all) the need for insurance shoots up and the likelihood of a claim is greater. You can completely remove this danger for your clients by recommending suitable premium cover, to protect and fund their policies, when they are disabled.

Beware not to confuse premium cover with the premium waiver benefits you sometimes find in health insurance, which typically waives medical insurance premiums for a year or two on the death of a life insured, but not when the life insured is disabled.

Premium cover does cost a small additional premium, but when one considers the critical protection premium cover gives, it seems like an essential recommendation to me.

I don’t see the value of premium cover only as being the value of the premiums the product might waive, possibly to age 65 or 70 (even though this may amount to tens of thousands of dollars: tens of thousands of dollars they don’t have to find to pay to keep their insurance alive).

For me, the real big value is the possible claims paid to the client by their life cover or trauma cover; or the significant medical treatment costs of private surgery or life-saving drugs not funded by Pharmac, paid by their insurer.

These are claims paid (amounting to potentially millions of dollars) because their policy, and its benefits, remained in-force and did not lapse when disability struck. Premium cover could just be the product enabling all these good claims outcomes and perhaps this is the answer to my initial question – premium cover may very well be the most important product a life and health insurance adviser recommends. ✚

Steve Wright has qualifications in Law, Economics, Tax and Financial Planning and is General Manager Professional Development at Partners Life.

This article is for information purposes only, its content is intended to be of a general nature, does not take into account your circumstances, situation or goals, and is not a personalised financial adviser service or legal advice. It is recommended you seek advice from a suitably qualified professional before you take any action or rely on anything stated herein.