There are many risks in this world, and the point of insurance is to try and mitigate the effects of these risks as much as possible. Due to insurance costs, you are not going be able to mitigate all risks. As such, you will want to make sure that you are not paying for something you don't need, which means minimising insurance overlapping and overinsurance.
Insurance overlapping refers to taking out insurance when you already have that base covered with another form of insurance. A common example of this issue comes when deciding to take out private health insurance or simply rely on Medicare. Overlapping between what you can claim through Medicare or through private insurance is relatively high, which does lead to many wondering whether they need to take out private health cover at all. Of course, Government tax incentives push most to choosing the potentially overlapping insurance, apart from those seeking a higher level of cover and benefits.
Paying for cover you don't need is an issue to be wary of when considering your life insurance needs, benefits and features. This is slightly complicated by the different types of life insurances available, these being:
- Death cover - Lump sum paid if you die
- Trauma cover - Lump sum paid if you suffer a serious illness (cancer, heart attack, stroke, etc)
- Total and Permanent Disability (TPD) cover - Lump sum paid if you (like the name suggests) become totally and permanently disabled, i.e. never able to work again
- Income Protection - Monthly benefit paid if you become disabled (unlike TPD can be partial and/or temporary)
OVERLAPPING - Death cover
Overlapping is probably a lower concern when considering death cover (due to lower premium rates) and usually comes in the form of overinsurance (i.e. insuring yourself for $2m when your family only really needs $1.5m). But this overinsurance tends to more easily occur due to a few reasons - automatic covers received inside super or part of mortgage, not taking into account assets available for sale, and insurances taken out through employers/own company. Also, over time, automatic increases for inflation (default feature of many insurance policies) can also lead to you being unexpectedly overinsured.
OVERLAPPING - TPD and Income Protection
Are both TPD and income protection necessary? YES. Even though they cover the same base event (i.e. disability), if structured well they will cover different aspects of disability and provide important protection for looking after your family in the event of your temporary or permanent disability. Also, as income protection can cover both temporary and permanent disablement, and both total and partial disablement, wouldn't taking out just income protection be sufficient? MAYBE, but probably not.
One reason for this is due to the fact that income protection can only cover 75% of your current income. So if you earn $100,000 p.a., income protection will pay you $75,000, a 25% pay cut. Most would not be able to afford a 25% slashing of their wages for any long period of time, which means taking out TPD to protect against long-term disablement can be an effective addition. An easy way to look at it would be for income protection to provide 75% of current income for the rest of your working life (e.g. until age 65) and for TPD to be calculated so as to provide the other 25% (plus incidentals such as emergency funds, renovation costs, extra rehabilitation costs, etc).
OVERLAPPING - Trauma cover
One of the regular concerns I hear from people considering trauma cover (other than the cost) goes something like this: "If I already have income protection in place, why do I need trauma cover?" A valid question seeing as most people simply want to make sure that if they do suffer a serious illness, that they don't have to worry about their income being stopped - a risk mainly mitigated by income protection. So if that is the sole reason for taking out trauma cover, then there would be a large overlapping of covers. However, like TPD, calculating your level of trauma cover to fund the 25% shortfall of income for a short period of time (1-2 years) and to cover other incidentals (spouse taking time off work, family moving closer to treatment centre, alternative treatment costs, emergency funds, family recovery holiday, etc) can be a good way to effectively protect you and your family's future should you become seriously ill.
So in conclusion, don't waste money on insurances you don't need, especially considering that you probably have other insurances that you do need, but may not have. And being conservative with the levels of cover you put in place can help you to spread your risk mitigation efforts further and utilise your hard earned money as effectively as possible.