Linked vs. Standalone structures, Buy back and Reinstatement

Bundled personal insurance policies (life, TPD and Trauma) have become increasingly popular in recent years. Insurance companies allow products and features to be bundled into packages because linking products together has the advantage of being more cost effective while at the same time providing wider cover options for customers.  Having one insurance policy with linked options, also means the insurance is all housed in one place, making things easier to manage. From an insurance company’s standpoint linked policies can enable them to make sure a client has adequate policies to cover them but also allow them to present attractive pricing and explain cover easily to a client.

Linked vs standalone policies

There are however a few simple but important points to understand about linked versus stand-alone insurance policies.

The key one being that with linked policies when you claim, the total amount you are insured for may change. With stand-alone policies, they are just that, separate. Claiming on one does not affect the amount of cover established on other policies

Let us get into the nuts-and-bolts differences and see how things might play out in a real-world scenario. We’ll put some numbers to the policies, but as with any example remember these are only indicative amounts and by no means represent what might be right for you or your family’s insurance cover needs.

Say, for example, you linked together a $450,000 Term Life Insurance policy, $200, 000 in TPD (Total and Permanent Disability Insurance), and $50,000 in Trauma Cover. Although you have $700,000 of cover the maximum you receive will be $450,000, in the event of your death or a terminal illness diagnosis. If you were to make a claim on TPD or Trauma the amount for these claims would be subtracted from the $450,000 to come up with a new total sum insured.

To provide a concrete example, if you had an adverse event (such as a heart attack) that was claimable under your trauma policy, you would receive $50,000 from that trauma policy, so your total sum insured now drops to $400,000. Without any reinstatement clause the trauma policy would cancel itself, so if you were to suffer a separate unrelated trauma incident you would not have cover.

With a stand-alone life insurance policy, you are essentially buying 3 separate insurance policies. Using the above example, you now have $700,000 worth of insurance. As a result, the costs are generally more. Although there might be some cost savings in policies fees by having multiple policies with the one insurance company, depending on the insurer. Importantly, the sum insured for with stand-alone policies is set for each policy and unaffected if you claim on one.

Buy-back option

With linked insurance policies, we have highlighted that the amount of life insurance will reduce inline with any TPD or trauma claim. There is a buy-back option that you can select upfront when you take out your policy.

How does the buy-back option work?

If you have chosen the buy-back option, you can have your life insurance policy returned to the previous amount after twelve months have passed from the claimable event. In the previous example, twelve months after a heart attack, the $50,000 reduction from the Trauma claim can be added back to the life insurance amount restoring it to $450,000. Basically, you pay a little bit more and bring your overall cover back up to a level that matches your lifestyle needs should you have to make a substantial claim in the future. Of course, even within these structures, the actual detailed nuances of linked, stand alone, and buy back policies can vary from insurer to insurer. The best thing to do to make sure you don’t make a mistake in obtaining the right type and level of cover for you is to take some time to meet and talk with an insurance consultant. At SMSF Insurance Partners we answer all of your questions free of charge and you are under no obligation.  And be sure to ask our insurance team about buy back options if you chose to link your policies.

Reinstatement option for Trauma

There is also a reinstatement option you can choose for Trauma cover. If policies are linked, and you have a claimable event on trauma, the trauma component of the policy cancels out. A reinstatement clause allows you to repurchase your trauma cover. However, there is one major condition. You will not be covered for any condition in a related category. For example, if you have a heart attack, you’re unlikely to have your trauma re-instatement cover a stroke, as it falls under cardiovascular events. If however, you were to contract cancer, that would pay out as it relates to a different category.

Insurance companies we deal with

In servicing the Australian community, SMFS Insurance Partners draw from an extensive platform of highly competitive insurance providers including MLC, MetLife, Zurich, AIA, Comminsure, BT and Clear View, amongst others. Our passion and skillset are knowing the insurance landscape inside out so that we can provide the most appropriate and cost-effective options to you. Call one of our highly trained consultants on (07) 3064 0413. Or message our team using our convenient website form.