When you look into life insurance, you may come across three key terms: exclusions, loadings and indexing. However, you might not have any idea what they mean! We’re here to help explain it to you, as well as make your purchasing decision a little easier.
|Life insurance exclusions are circumstances that are not covered by your life insurance policy, which generally means you will not be able to make a claim for these events.|
|Example: You’re unable to get cover for a critical illness after you’ve been diagnosed with the critical illness (e.g. cancer).|
|Life insurance loadings are an additional fee you pay for life insurance premium cover if you’re more likely to make a claim in the eyes of the insurer.|
|Example: You have a history of heart disease in your family or have other pre-existing conditions.|
|Life insurance indexation is the process in which your insurance payout amount changes over time. Often, it will change in line with either a set percentage or inflation, in order to keep up with the cost of living.|
|Example: Cover taken out in your 30s is indexed, so your payout is still relevant to the cost of living in your 50s.|
Exclusions, loadings, indexing and all other terms and conditions of a life insurance policy can be found in the Product Disclosure Statement (PDS).
When it comes to which circumstances are excluded from life insurance, exclusions will vary from policy to policy. However, some common exclusions include the following:
Some of the above exclusions are referred to as general life insurance exclusions and typically apply to everyone taking out a life insurance policy. General exclusions may include suicide and self-harm, illegal activity, a terminal illness at the time you commence your policy and behaving unwisely.
Specific life insurance exclusions are unique to your situation and will usually differ between policyholders based on their different circumstances. A risky lifestyle filled with dangerous activities, bad health, high-risk travel plans and a dangerous occupation are all examples of specific exclusions.
A loading fee is a percentage increase in price on standard life insurance premium rates. A loading fee is based on your level of risk (i.e. if there’s a higher likelihood of you making a claim in the future due to certain circumstances and situations).
These loadings can affect your life insurance policy by increasing the cost of your premium. Common examples of life insurance premium loadings include:
Your loading fee and the criteria for life insurance loadings will differ depending on your insurer.
Making life insurance claims that are the result of something specifically excluded by your policy are likely to be rejected by your provider, and your loved ones could be left without a proper safety net as a result. This is why you must read and understand the terms and conditions in your policy document.
You can generally opt-out of indexation on your life insurance if it was applied as standard at the point of application. Avoiding inflation may ease the rise in your life insurance premiums, but the potential payout will suffer as a result of increases in the cost of living.
If you don’t think you’ll require an increase over time to the amount you’re insured for, you can get in touch with your life insurer and discuss indexation with them personally.
In some cases, you can ask your insurer to review a particular premium loading or exclusion if your lifestyle or circumstances – and associated level of risk – have changed.
For example, you might be able to have your loadings or exclusions reviewed and changed if you’ve:
Having your cover reviewed could make a difference to the price you pay and what you’ll be able to make a claim on.
The loadings calculated on life insurance premiums differ between providers, not to mention they will also vary based on the insured individual. As a life insurance customer, you’re bound by a duty to take reasonable care not to make a misrepresentation to your insurance provider about your lifestyle and health at the time of application.
Your provider will then use this information to determine whether you’ll incur any loading.
Indexed life insurance is either calculated as a fixed percentage or in line with changes to the Consumer Price Index (CPI), which measures the rate of inflation. The CPI is calculated against the changing price of goods and services in Australia, making it an appropriate way for reassessing life insurance payouts.
Typically, an insurance policy will define indexation as a fixed rate (e.g., 5%) or the CPI inflation rate, whichever is greater.
With indexing, there’s the possibility your premiums and payout amount could increase in both price and value, either at a fixed rate per year (for example, 5%) or at the rate of inflation.
Without it, your premiums may be cheaper (although some insurers index at no extra cost), but your potential payout would stay the same, which – in real terms – amounts to less over time. With the rising cost of living, indexing can make a big difference over the long term.
For example, if you’re insured for $100,000 and your life insurance policy is indexed at an inflation rate of 4% for the year, your sum insured will increase to $104,000. If the inflation rate is consistently at 4%, your sum insured will increase by 4% year after year.
Over the long term, this can make a substantial difference in your payout, albeit while incurring a higher premium. The graph below shows an example of what this might look like.
N.B. Inflation and consumer pricing can change multiple times throughout the year, and likely won’t increase at the same consistent rate every year. The chart above is for illustrative purposes only.