The biggest challenge relating to the current life insurance offers of insurance companies is their immense quantity. There is a wide range of types of life insurance policies, kinds of risks, ways of determining the insurance sums and durations of insurance to choose from.
A properly adjusted life insurance policy should be based on choosing the risks required in terms of consequences of a risk event for the personal/family budget.
That should be followed by determining the insurance sum (level of coverage).
Before choosing the risks to be included in a life insurance policy, keep in mind that risks offered by insurance companies can be divided into the following three groups based on the level of impact on the personal/family budget:
serious risks (so-called must have’s),
less serious risks (so-called nice to have’s)
and useless items.
The specific division depends on the individual, their income structure, reserve and commitments and may change over time. The life insurance policy of a young person with no commitments should differ from the life insurance policy of a breadwinner with three children and a mortgage or of a person approaching retirement age with adult children and a paid-off mortgage.
An ideal coverage constitutes a combination of three to four basic risks:
- lasting consequences of an injury and
- critical illnesses (insurance aimed at providing [a better] health care and covering a short-term loss of income) and
- risk of disability (covering a long-term loss of income, rather than a short-term one, as invalidity is re-evaluated no sooner than after one year of incapacity for work)
- and, in case the client has any commitments, also the risk of death.
Disability risk insurance
Contrary to popular belief, in terms of impact on the personal/family budget, disability, rather than death, is the most serious risk. If we look at this issue from a purely financial aspect, an event due to which the breadwinner is unable to work (resulting in loss of income), but which they survive (costs accrue or even increase, e. g. for essential health care, personal care, special equipment, conversion works in the household etc.), is a much bigger financial disaster for a family.
From the point of view of statistics, the breakdown of the risk of disability versus death is equally noteworthy. According to the most recent Report on the health of the population 2015 (published by the Public Health Authority of the Slovak Republic), 2014 has seen a total of 13,417 people in working age (25 to 64) pass way.The total of newly recognized disabled persons in working age over the whole year of 2014 was 22,665 persons.
In working age, the probability of disability is several times higher than the probability of death – more than 130 % for men and almost 250 % for women. If a limited family budget forces you to choose between taking out an insurance against the risk of death or the risk of disability, the numbers speak for themselves. It is noted that the Social Insurance Company (Sociálna poisťovňa) distinguishes between two types of disabilities:
disability entailing a decrease in the capacity for work of 40 % to 70 % (so-called partial disability)
and disability entailing a decrease in the capacity for work of more than 70 % (so-called total disability).
The ratio of partial to total invalidity is 73:27 %. Logically, the insurance should therefore cover partial disability as a priority, followed by permanent disability.
How can disability be insured within a life insurance policy?
What can be insured: disability exclusively due to an injury, disability due to injury and illness, with the following coverage options: partial and total disability with the insurance sum being paid out: as a lump sum, as a monthly/yearly pension (up until a certain age), exemption from insurance payments for all the other risks included in the insurance policy.
Your financial advisor can help you choose and determine the level of insurance claim correctly.
Other serious risks include lasting consequences of an injury, critical illnesses (of civilization) and the risk of death. Grave injuries and illnesses have a long-term impact on loss of income and result in the need for financial resources to cover the costs of treatment but may not be sufficient for recognition of disability.
Insurance of lasting consequences of an injury
The aim of the insurance of lasting consequences of an injury is to provide sufficient financial resources for (a better) health care and loss of income in case of a grave injury (resulting in lasting consequences in form of a loss or a decreased capacity, e. g. of an extremity). This is not to be confused with a common daily benefit insurance during treatment of an injury which also covers less serious injuries. Following the claim event, a medical professional determines the scope of lasting consequences of an injury and the insurance company pays out the claim as a percentage of the insurance sum.
Example: If the client’s basic insurance sum is EUR 10,000 and they lose a tooth due to an injury, the insurance company pays out e. g. 1 %, i. e. EUR 100.
The insurance claim is generally paid out after the consequences of the injury have stabilised, within a period of 1 to 5 years from the injury. An exception to that are loss injuries (e. g. loss of an extremity), in which case the insurance company is immediately able to determine the scope of lasting consequences, and thus to pay out the insurance claim immediately. In case of an extremely grave injury, high-profile insurance companies are also able to pay the client immediately in form of an advance payment of the insurance claim. This risk might be purchased with a so-called progression of the insurance sum, which means that from a certain percentage of lasting consequences the insurance company pays out a multiple of the agreed-upon insurance sum (if the agreed-upon progression is 500 % and the insurance sum is EUR 10 000, in case of 100 % lasting consequences, such as the loss of sight, the insurance company pays out EUR 50 000).
When considering the insurance of lasting consequences of an injury, keep in mind what consequences a minor injury as well as a grave injury might have on your personal/family budget, and approach the adjustment of the insurance sum accordingly. For example, an office worker might be able to go to work with a broken leg or deal with a part of the agenda from home via their PC, which is not probable in case of a serious car accident.
Insurance of the risk of critical illnesses
Insurance of critical illnesses is based on a specific list of critical illnesses specific to the insurance company (e. g. cancer, heart attack, blindness, deafness etc.) with the whole insurance amount being paid out to the client if they are diagnosed with one of the illnesses on the list. The main purpose is to ensure a better health care (than the one provided by the Slovak health system) and to cover the loss of income. The main differences between individual insurance companies regarding this type of insurance are as follows:
- the list of illnesses covered (e. g. not all of them cover mental illnesses or in situ cancer),
- number of days/months the client has to live through after being diagnosed before the insurance company pays out the full insurance claim and
- the so-called qualification period (the earliest point for the illness to be diagnosed after taking out the insurance when the insurance company can pay out the claim. For example, if the qualification period is six months and the client is diagnosed with a critical illness in the third month, the insurance company will not pay out the claim.
The aim of a death insurance policy is to cover the costs of funeral of the policyholder as well as to cover the loss of income and payout of any debts. Such insurance can be taken out in different variants and forms. These typically include:
- insurance of any type of death
- insurance of injury-related death – this type of insurance is cheaper than the insurance of any type of death and is generally classified as belonging to the “useless” category,
- insurance of traffic-related death is also a very cheap kind of insurance belonging to the “useless” category.
If you are choosing a life insurance policy or re-evaluating your current one, what you need to consider first is the coverage of critical and chronic illnesses or consequences of an injury. Once you have a solid base to build upon, you can think about any supplementary insurance cover.
Less serious risks with a temporary impact on the family budget
This risk category includes daily benefits in case of incapacity for work or treatment of an injury with the same denominator: these benefits are typically paid out over a maximum period of one year. Therefore, if you are thinking about taking out an insurance, you may want to think about whether you buy a one-year coverage for your money, or several (decades), e. g. in case of disability. These risks can be optimally covered by creating a financial reserve. Should the insurance event not arise, the reserve funds can be used for a different purpose.
Daily benefit insurance of incapacity for work
When it comes to insurance of incapacity for work, the insurance contract specifies the main parameters – the amount of daily benefit and the minimum duration of incapacity for work (i. e. you must be officially incapacitated for work) required for the payout of the benefits. The daily benefit sum is generally bound to your income, i. e. the insurance company examines your income at the time of the insurance event, with the insurance claim aimed at evening up the incapacity benefit from the Social Insurance Company and your income. For example, if you pay yourself minimum wage as an entrepreneur, an incapacity for work insurance of EUR 50 per day is completely useless, as it will be challenging to submit evidence to the insurance company confirming the loss of income. Insurance companies differ in their offers of daily benefit insurance policies, mainly in the second parameter – they offer the option of insuring the incapacity for work of at least 7, 14, 21 or 62 days, as well as in whether the daily benefit can be paid out retrospectively. Example: If you have taken out an incapacity for work insurance from 21 days and you have been incapacitated for 15 days, the insurance company will not cover any of them.
Daily benefit insurance during treatment of an injury (the duration of the essential treatment of an injury)
This daily benefit insurance is not bound to the incapacity of the client for work, i. e. they do not necessarily need to be officially incapacitated, but are receiving treatment after an injury (i. e. you may be able to go to work with a broken hand). Each insurance company has so-called evaluation charts which specify the duration of the treatment of a specific injury.
Example: In case of a simple fracture, the duration is 21 days, meaning that the insurance company pays out the agreed-upon daily benefit over a period of 21 days at the most. If the treatment takes less time, the daily benefit is only paid out over the actual duration of the treatment. If it takes longer, the insurance company may be able to re-evaluate the maximum claim after receiving relevant evidence.
Completely useless items in life insurance (for most clients)
These are typically the following risks:
- daily benefit insurance of injury-related incapacity for work (statistics show that the cases of injury-related incapacity for work constitute 12.11 % for men and only 5.56 % for women – the probability of injury-related incapacity for work is extremely low),
- daily benefit insurance of injury-related hospitalisation (cases of injury-related hospitalisation constitute only approx. 13 % for men and less than 10 % for women),
- insurance of injury-related surgery (similar to the above-mentioned),
- insurance of traffic-related death (according to statistics, 2014 has seen 2.7 % of men and 1.9 % women pass away as a consequence of a traffic accident) – if you require death insurance, you may want to opt for coverage of any type of death regardless of the cause,
- job loss insurance (if you read the terms and conditions of insurance, you will find that the job loss needs to occur in an extremely specific way, e. g. in context of mass redundancies reported to the labour office).
The selection of specific risks included in your life insurance should correspond with your current needs, i. e. apart from the above-mentioned aspects of your situation, you need to consider your profession, sport activities or health (especially when adjusting your existing life insurance policy). If you have any questions relating to your current insurance policy or if you are considering taking out a life insurance policy, please do not hesitate to contact me via the contact form. I would be happy to advise you in this area!