Common mistakes Doctors make when setting up Insurance Cover
When we review insurance cover for our clients, we often find issues arise due to cover not being established correctly or that the clients situation has changed and cover has not been modified accordingly. Most of these problems are not identified until it is too late.
Some of the most frequent errors that we encounter are discussed below.
Incorrect levels of cover
It is very common to see medical professional’s with very high levels of income protection under an “indemnity” contract. This is often through Superannuation or via a direct insurer, that does not financially underwrite their policies. The danger here is that at claim time this insured value needs to be proved. For employees this may mean simply providing historical payslips (minimum). If you were self employed or a business owner this involves the release of company accounts including compilation of profits and losses etc. If there is any “unearned income” such as investments or other buisness income that did not require personal exertion, this could also offset the claim amount. A nasty surprise when you are quite possibly lying ill or injured in a hospital bed and having to provide these financials before payments begin.
There is also a tendency to only cover debt and replacement income in the event of death or total and permanent disability. This is more often than not insufficient. Factors such as housing modifications, employing carers etc etc need to be considered. As a general rule of thumb 12 times your living expenses is normally what would be required in these circumstances, though this is a very simplistic solution and does not take into account your unique circumstances.
It’s not always just about you
Even if your family members do not earn an income, it is still a good idea to insure them. If a family member is injured or ill you will likely have to cover medical expenses or take time off work to care for them, thereby reducing your own income. From a long-term perspective if a spouse is no longer able to care for your young children or keep the home running alternative arrangements may need to be found and funded. Insurance such as trauma cover is often the simplest solution. It is key to also consider cover not only your spouse but also your children and even other members of your family if they are financially dependent on you.
Stepped vs Level premiums
Are you planning on holding cover for a long period of time? Medical professionals tend to work well into their 60s in at least some capacity. If you do still require some insurance cover at this age and use a “stepped” premium structure (which bases its premium on your age) this will become extremely expensive. Using a “level” premium structure means that your premiums are based on the age at which you established your insurance cover. If you started early enough this can mean that cover is much more affordable later in life, when you are far more likely to make a claim.
One of the common errors is often taking an “all or none” approach and having all cover on “level” or all cover on “stepped” structures. A blended approach involves making use of both types of insurance. Utilizing some “stepped” insurance to establish cover for debt and other short/medium term needs, the aim being to reduce this over time when high levels of cover are no longer required. At this point you would still have your “level” cover remaining as the baseline for long term protection.
Consider your tax structure
As most people know income protection is tax deductible, however using Superannuation to fund this type of cover means you might miss out on a personal deduction. As an alternative Life and Total/Permanent Disability insurance can be owned inside superannuation (linked policies allow TPD Own Occupation definitions to be used) and then a tax deductible contribution can be made to cover the premiums, often with a 15% tax rebate to the fund. If you are not maxing out your concessional contributions each year (currently $25,000 for the 2018-19 financial year) this can be very handy. It is also worth keeping in mind that TPD held inside superannuation is taxable if it is paid out and this needs to be accounted for.
Who does money flow to?
Following on from above, if you have insurance within your superannuation fund you will want to ensure that it is paid to the right person if a claim is made. This is done by completing “nomination of beneficiaries” paperwork, that instructs the trustee of the superannuation fund exactly who you want money to be paid to. A binding nomination like this must be followed by the trustee. However some superannuations don’t allow for these kind of binding nominations and a persons requested recepient is only seen as a “suggestion” by the trustee.
Far too often a nomination will include children and although they can accept the money paid at claim, they are probably not able to manage this at a young age. Other pitfalls are nominating adult children, siblings or parents - they are not considered dependents for superannuation purposes, which means this payout would be taxed. In extreme cases lack of a nominated beneficiary can result in funds being paid to ex partners in accordance with the law and almost certainly against the wishes of the deceased.
The right legal documentation is critical
Insurance cover is intended to provide funding for a specific purpose in specific circumstances. This ranges from the very personal e.g. funding your loved ones living expenses if you die, to the professional e.g. succession planning and funding an exit strategy for a business, ensuring that other partners are not left with debt and have access to funds to cover your position.
All of these arrangements require legal documentation to be completed upfront to ensure that insurance payments are paid appropriately e.g an up to date will. In the case of succession planning other factors such as agreement on the valuation methods to be used, who exactly gets access to funds, how they can be used etc etc are vitally important and again this needs to be documented appropriately. We see time and time again businesses and practices being established on a handshake agreement but unfortunately this is seldom how they end.
Get the right advice
All of the examples used above are for illustration purposes alone and should not be taken as specific advice. When putting together risk protection strategies an adviser, or panel of specialists, should take into account all elements including your family, business and any trusts or superannuation structures used. They must then consider how these different elements might work together to form specific advice just for you.