6 things to consider before reducing your cover

Looking out for the future of our loved ones is a top priority for everyone. We want to make sure they are protected financially, no matter what comes their way. Stay with us as we explain why it's so important to have enough insurance cover. We're here to shed some light on the reasons you may consider before deciding to decrease your personal insurance cover.

Pause and reflect: Some points to ponder 

1. Hard to increase in future: Although reducing cover is easy, increasing back up again is hard. If you're only looking to reduce it for a little while, you might want to consider if you're up for going through the underwriting process again if you decide to increase it later on. 

Check out how the underwriting process looks like here. 

2. Health changes: If you've had a health event since taking out the cover or it starts to decline after reducing your cover, it might be tough to get more cover in the future. So before you make any changes, we suggest getting a check-up before making any changes. 

In the face of health changes, consider the story of Jason Milosevski. Jase was a picture of health before his diagnosis. Fit, active, and full of energy, you wouldn't expect anything to slow him down. But at the age of 42, Jason was diagnosed with an aggressive pancreatic tumor that had metastasized to his liver. Unable to return to work, the financial impact could have been devastating. However, having income protection insurance eased the financial stress, allowing him to focus on his health and recovery.

You can know more about Jason's story here. 

3. Consider future financial obligations: If you know you'll be earning more or taking on more debt soon, it might be a good idea to keep your current level of cover for now. That way, you can reassess your situation later and make any necessary changes.

4. Your current contract can never be bought again (pre-2021 policies/or agreed value contracts): If you're considering cancelling your income protection policy and getting a new one, or taking up cover elsewhere at another time, keep in mind that some of the older and much more generous policies are no longer available. The policies that are currently available are more difficult to claim on than the older ones.

Check here out to know more about these changes.

5. You just never know: Unfortunately, we work in the business of insurance and as such see time and time again healthy people needing to claim on these policies. It's important to know that income protection covers potentially millions of dollars should you need to claim on it, providing a safety net for unexpected circumstances that could have a significant financial impact. On the other hand, car insurance, which may also come with a hefty premium, typically covers only the value of the car, such as $20,000. When comparing the two different premiums, it becomes clear that income protection offers a much broader scope of cover. Every time a healthy person needs to claim on these policies, the same sentence is whispered: 'I never thought this would happen to me'. This only shows how can life can be unpredictable and it's good to have an adequate cover in place. While insurance premiums can be a pain in the neck, it's crucial to consider the long-term benefits and peace of mind that comes with having these covers.

6. Level premiums: Hey, remember when you first got your insurance policy? You were probably a bit younger and may not have considered how your coverage needs could evolve over time. It's worth noting that if you have level premiums, the pricing was set back then, which means those policies might actually be cheaper than what you can find now. So, before you think about reducing them, keep in mind that you don't want to be caught off guard by unexpectedly higher premiums down the road.

See the difference between stepped and level premiums here.

Thinking about your future cover 

When you're young and fresh-faced, you've got a whole lot of life ahead of you—the mortgage, on the other hand, has a use-by date. As you make those regular mortgage repayments and the outstanding balance decreases, the financial burden on your family reduces too. So, the thinking is, "Why pay for a massive cover amount I won't need in the future?"  

Yup, your mortgage decreases over time, but the rest of life? Not so much. Daily costs, your kids' education, health issues, future plans—they're not going anywhere. And don’t forget good ol’ inflation. As the cost of living goes up, you might find yourself needing more cover, not less.  

We're not here to push you into keeping a cover you don’t want. But if you’re thinking of decreasing it, just remember to consider the whole picture. 

Here’s an overview how a protection plan may help: 

Source: AIA, The value of life insurance

Some options we can look at  

1. We can look at options to change payment structures. If you have a short-term cash flow crunch, we can look at ways to move more cover within your superannuation fund.

Head over to this article to know how to pay a premium from your super fund. 

2. We can look at removing features or benefits before reducing the level of cover or canceling altogether.

Personal insurance can range from basic cover to more comprehensive types of cover. You can go basic or all-out with a comprehensive plan that includes extra benefits and features, but usually costs a bit more. It's always a good idea to chat with your financial adviser to help you figure out if it's worth adjusting your cover.

For a list of product benefits and features, check out this blog and read the financial product disclosure statement (PDS) from insurers. 

3. Remove indexation on the policy. Or also known as “inflation proofing” is a feature that increases your level of cover (and associated premiums) to take inflation into account. This won't immediately change your premiums today but can help manage long-term premiums.

If you're not interested in getting any more indexation offers, you can just fill out a simple form to decline any future increases. See sample below from Zurich:

4. Review and remove any loadings or exclusions. If your health has improved since you first took out the policy, it might be worth checking if you have any loadings (additional premiums) or exclusions. Regular check-ins with your insurer or financial adviser can help identify any changes that can be made to your policy based on your improved health status. Removing loadings or exclusions can lead to more comprehensive cover without compromising on affordability.

Read more about exclusions and loadings on life insurance policies here

Case Study

Sean, 43, Spinal cord injury

At 37 years old, Sean and his wife had just purchased their first home and were ready to start their family. With a mortgage and potentially children on the way, Sean decided to buy a personal insurance policy. He wanted peace of mind to know his family would always be protected.

Sean didn’t expect to use his insurance a year later when he was involved in a serious car accident. The accident left Sean hospitalised for almost five months and a T4–T6 (mid-thoracic) paraplegic. As a result, he could no longer work and required fulltime care from his wife.

Sean was in denial about losing his independence. His wife decided that prior to his discharge from hospital, significant modifications were needed in the home. With advice from an occupational therapist, the first phase of modifications included buying essential items such as a wheelchair and an electrical bed, and installing ramps and rails around the home for accessibility, which cost over $30,000.

Since Sean’s return home, he sees a physiotherapist fortnightly for pain ($105 for 30 minutes) and requests home visits from a nurse for any bowel, bladder and pressure area management (as required, covered through the National Disability Insurance Scheme). In Sean’s journey to regaining independence, he has required additional fixtures in the bathroom and equipment to help with household tasks (~$7,000 per year). Fortunately, their insurance policy has covered most of their costs.

In the last year the couple has achieved major milestones. Sean has learnt to drive again and has had his car modified with portable hand controls. His wife has returned to the workforce with reduced working hours. Given the lifetime effects of spinal cord injury, Sean and his wife worry about the uncertainty of the future, but their insurance policy has given them a peace of mind from a financial perspective.

Source: Zurich Insurance Group. Cost of care whitepaper 

When it comes to protecting your family's future, it's about having a fair go and making sure your loved ones are looked after, no matter what. Again, life's no picnic, and you never know what's around the corner.

Get savvy, have a chat with your financial adviser, and get the cover that's as solid as a good old Aussie meat pie.