There are some case studies to understand the concept of insurance

1. Case Study- Insurance
Bob is a 25 year old qualified carpenter who is a subcontractorto various builders. He is
earning $70,000 gross but pays $20,000 in expenses, most which are fixed expenses ie a
leased car and leased equipment. Bob rents an apartment and spends the rest of his
earnings of $50,000 on living and entertainment expenses. Bob has little in the way of
savings.
What if Bob doesn’t have insurance?
Bob has a car accident and is hospitalised for one month. He then faces a long and painful
rehabilitation process of12 months to try to regain the use of one of his arms. Even with
private health insurance there are medical bills to be paid particularly for physiotherapy
and rehabilitation sessions. Bob has no income for13 months but must continue to pay his
lease costs of $20,000 per annum. What little money Bob receives in disability payments
from the government won’tcoverhis rental costs. Bob has to movebackhome and borrow
money from his parents. If he doesn’trecover the use of his arm Bob will never be able to
work as a carpenter again and will have to retrain into a potentially lower paid job.
What Insurances could Bob have taken out?
1. Income Protection
Bob could have taken out income protection for 75% of his net income of $50,000 which
would provide him with a monthly benefit of $3,125.
As he had no sick leave or savings to fall back on ideally Bob should take out the shortest
waiting period of 14 days but this is also the most expensive. Other alternatives would be
to take out a longer 30 day waiting period but include an accident option which would
begin payments from day one if he suffered an accident or to take out a “Plus” product
which includes a benefit payable within the waiting period if he is confined to bed.

2. Due to his youth Bob should ideally take out an age 65 benefit period as if his injury
proved to be permanent and he could not work again in his own occupation he would be
paid a benefit for the remaining 40 years of his income earning capacity. He should ensure
that the policy is “ownoccupation” for the whole of the benefit period otherwise he could
beforced to return to work in any other occupationhe is suited to byhis training, education
or experience, even if lower paid.
Due to his age Bob should consider a level premium rather than a stepped premium as
there is only a small difference in price between the two at his age but over the long term
he will pay considerably less if he retains his policy long term.
Other desirable features/benefits:
 Claims Escalation/Indexation – so when on claim payments keep pace with inflation
 Specified injury benefit – pays a set benefit for certain fractures or injuries
 Lump sum TPD benefit – pays a lump sum in event of a total and permanent disability
 Future guaranteed insurability – allow increases to cover for certain life events
 Severity benefit – increases benefit by 33% if serious disability is suffered
 Rehabilitation benefit – incentive payments to retrain in another occupation
2. Business Expenses cover
As his income protection will not cover his $20,000 of fixed expenses Bob could have
taken out 12 months cover for this so that he did not have to meet these expenses out of
the $3125 he received from his income protection
3. Total and Permanent Disability (TPD) / Life insurance
Bob could have taken out an amount of $500,000 of TPD cover so that if he was totally
and permanently disabled and unable to work again he would receive a lump sum to
supplement his income protection payments. This could be used to pay medical expenses,
home modifications and even to purchase a house of his own. Although he had no

3. dependants yet to leave a death benefit to, taking out the same amount of life cover while
he is healthy provides protection against an unforeseen event causing his health
deteriorating in the future and making him uninsurable.
Other desirable features:
Future guaranteed insurability – by including this option Bob will be able to increase the
cover on the occurrence on certain life events eg marriage, taking out a mortgage, having
children even if his health has deteriorated.
Own Occupation TPD – a more expensive option than Any Occupation TPD but would
still pay a lump sum benefit if Bob could no longer bea carpenter but could return to work
in a lower paid job.
What if Bob had these insurances?
If Bob’s policy had a 30 day waiting period he would normally not be entitled to receive
payments until 30 days after his injury (or later depending on insurer processing dates)
and so he would might have to draw down on savings or seek support from his family for
this period. However Bob’s income protection policy included a Bed
Confinement/Nursing Care benefit payable within the waiting period so he received a
benefit while he was hospitalised for the first month and then his normal payments
commenced. After 30 days Bob also started receiving benefits from his Business Expenses
policy to cover his lease payments.
As a consequence Bob was able to stay in his apartment and be self sufficient while he
recovered. As Bob’s income protection policy was own occupation for the whole of the
benefit period Bob continued to receive payments from the insurer while he was unable
to perform the duties of his own occupation ie carpenter. Bob’s policy also included a
rehabilitation benefit which meant that if Bob wanted to retrain in another trade the insurer

4. would pay the costs of this. If Bob’s injury was permanent and he was not capable of
working again and his policy included the lump sum TPD option he could convert his
stream of future income payments to a tax free lump sum. If Bob had taken out separate
TPD insurance he would receive a lump sum of $250,000 which he could use to
supplement the ongoing payments from his income protection policy.