The Meaning of Life

There's a push on to get people to sign up for more life insurance. That's partly about Australians -- ever the optimists -- being underinsured as a group, sure. But if the financial services sector were completely upfront they'd also acknowledge life insurance is a pretty profitable product, and one that's quarantined, so far, from proposals to ban commissions, which can be lucrative.

OK, first the scary bit. According to the industry's Lifewise national education campaign the average life-insurance payout is $91,000, but the average family with young children has debts totalling $167,000.

It puts the average payout for total and permanent disablement at $71,000, and this is in circumstances where the policyholder is unlikely to ever work again. The average payout for trauma (or critical illness) insurance is more realistic at $155,000.

There's more: Insurer AXA's 2009 Protection Report found just 16 per cent of Australians saw a risk of being in a serious car accident and only 25 per cent expected to suffer a serious illness. But more than 1600 people die on the roads a year and one out of three men and one out of four women will be diagnosed with cancer.

Fair enough. But, suitably informed, fear shouldn't be the basis for any financial decision, even insurance. So here's 5 questions to ask yourself when you look at your insurance needs:

1. How much risk can you afford to cover yourself? What savings and personal resources do you have? Would you accept a lower standard of living if life dealt you a bad card?

(Advisers seem to think we all need $100,000 a year to survive and couldn't possibly downsize.) Go to an insurer to cover the surplus risk you can't cover yourself.

2. What's the risk anyway? If you're young, healthy, with no kids and manageable debt you may not need life insurance -- and you've probably got some with your super anyway. Later in life, if you've paid off your mortgage and the kids have moved out perhaps it's time to cut back or drop your life insurance.

3. Precisely what are you buying? Read the product disclosure statement inside out. There's no point paying for a policy that won't give you want you want anyway, or will be difficult to claim against because of the fine print. Nor do you want a policy that gives you more than you need. Find a policy that fits. That said, life insurance is one of the more straightforward ones.

4. Should I fill in all those medical forms or just go for "automatic acceptance". Underwriting, as that's known, is a pain, but you might (and it's only a maybe) get a cheaper policy out of it because you're a better than average risk. Underwriting should mean there's less room for argument later, too, should you have to claim. By the same token, be aware you might end up with a 'loading' because of your medical history and perceived risk.

5. How would the money be paid out? Sometimes a payout can get caught up in red tape, so it might be better to have your partner "own" the policy on your life. (Gloomy, but realistic).

Finally, some people are pretty cynical about insurance companies but there's usually not too many arguments over whether someone died or not. And the fact is that the industry does pay out an average of 80 cents of every dollar it collects in premiums.

Just make sure you're making an informed decision, not one based on fear.

Credit Cards: 12 is the new 10

Financial services researcher Canstar Cannex has just released its latest credit card star ratings report and it says the days of 10 per cent low-rate cards are gone.

"Cards charging under 10% interest have become a casualty of the tight financial times, as financial
institutions hike up the rates on cards at the lower end of the market," it says. "Twelve is the new ten, it seems," with more credit cards gravitating towards 12% or even 14%.

And that's on cards where you forgo interest-free days in return fora low rate.

Fully featured cards -- the ones that come with rewards points and 45 to 55 days interest free -- are charging around 21 per cent on the debt you leave to pay off next time round.

“Many people with a mortgage are paying about 2% less now than they were a couple of years ago, yet credit card rates have gone up, not down,” Canstar Cannex financial analyst Peter Arnold says.

That's because banks are paying more for the funds they loan out as credit, and they see "unsecured" credit card debt as risky. (They can't get their money back by going for your house or car if you go bad on them.)

Interestingly, Canstar Cannex's best low-rate cards are all from credit unions: Sydney Credit Union, mecu and Credit Union SA, all on 10.49%.

The bottom line is that the interest rate doesn't matter if you pay off your card at the end of each month. Use your card for convenience, not to buy things you can't actually afford.

And don't be put off by the annual fee on low-rate cards. Paying a high rate of interest on a card without the annual fee is a false economy -- you'll easily find yourself worse off.

10 Things About Your Credit Card

Consumers have resumed their love affair with credit, after Australia emerged from the global financial crisis relatively unscathed. But recent news of a rise in unemployment is a reminder that credit card debt is the last thing you need if you strike one of life's road bumps in the form of job loss, injury or illness.

Reserve Bank of Australia statistics show credit card debt is actually higher than a year ago, at about $48 billion or an average of around $3300 each.

Of that, about 70 per cent accrues interest each month because it’s been rolled over at the end of the month, rather than being paid off.

So, pause before pulling out the plastic again and consider the10 things you should know about your credit card:

1. Credit card rates have their own life

 The first thing you should know is that credit card interest rates have a life of their own.

On the way up, card rates generally increase by more than the RBA’s official rate, and on the way down they decrease by less than the RBA rate.

When official rates rose in early 2008 the RBA moved 0.5 of a percentage point higher in two bites but some cards jumped nearly 1 percentage point.

On the way down, the RBA shaved a whopping 4.25 percentage points off the cash rate but low-rate cards fell a measly 0.25 of a percentage point and standard cards just 1.60 percentage points.

There’s been a dramatic increase in the gap between the RBA cash rate and the average low-rate card – the sort of card you should be using if you don’t pay your balance in full each month – from a gap of 5 percentage points in early 2008 to a margin of about 9 percentage points now.

That’s costing Australians, by one estimate, as much as $1 billion in extra interest.

2. One card can have two interest rates
Credit card providers tend to charge different rates on the one card these days, with very high rates applying to cash advances.

While the advertised rate will be the one that applies to purchases, a significantly higher rate may be charged for taking cash. With some low-rate cards the cash rate can be double the purchase rate.

And interest-free periods usually don’t apply to cash advances. In most cases you’ll pay interest on an advance from the time you take the cash. There may also be a “withdrawal” fee.

Be aware, too, that paying a bill using BPay can be regarded as a cash advance rather than a purchase.

3. Balance transfers can be dangerous

Transferring your existing debt to a card that has a low introductory rate might be tempting, but there are traps.

For instance, it might be stipulated that any new purchases – as opposed to the debt you’ve transferred – will attract interest at a high, “standard” rate, not the discount rate.

Also, any repayments you make might be applied last to the more expensive part of your debt.

4. Pay late and you'll pay again
 Many card providers use “sly” tactics to extract maximum interest from people who pay their bill late, or not in full.

Apart from straight-out late payment fees – perhaps $30 – you may lose your interest-free days on new purchases if you haven’t paid your previous balance in full by the due date.

When you pay some of your bill on time but not all of it, you could be charged daily interest backdated to when the original purchase was made.

5. The minimum repayment won't clear your debt

 Minimum repayment levels vary from card to card, ranging from 1.5 per cent to 5 per cent a month but most commonly 2 per cent.

According to the Australian Securities and Investments credit card calculator (at www.fido.gov.au), if you pay just the minimum 2 per cent each month on a $10,000 credit card debt – and don’t spend any more – it will take around 60 years to clear the debt, at the cost of $30,000 in interest.

Make your minimum $250 instead of $200, though, and you’ll pay the card off in five years or so.

6. Surcharges apply
Merchants can apply a surcharge to cover the fees they’re charged by card providers but they must declare this upfront. A shop might charge 2 or 3 per cent.

Airlines, however, are slugging people with flat fees, rather than a percentage, for credit card purchases, and $7 on a $100 cut-price ticket translates into 7 per cent.

Use a debit card to avoid these fees.

7. Cancelling credit cards might not improve your credit
It’s true that having fewer cards can make you more creditworthy, but it depends how you go about cancelling existing cards.

If you pay off a card using your own money before cancelling it, that will help. But there’s no point borrowing money to pay off your card debt.

8. Sign your card, or you’re not protected.
In the US, some cardholders have started to promote the idea that if you don’t sign your card no one can forge your signature.

However, you have an obligation to sign your card because the signature is a form of verification. Visa Australia says if a cardholder doesn’t sign the signature panel, they won’t be protected in the case of unauthorised use of the card.

MasterCard says merchants would consider an unsigned card invalid.

9. Don't assume you have a purchase warranty
It’s a misconception that using a credit card automatically bestows a purchase warranty. Warranties aren’t a standard feature on all cards but more likely to be linked to premium cards.

MasterCard says if you’ve paid for a product but you haven’t received it or it’s faulty, yes, you should ask your card provider whether you’re eligible for a refund – making sure you act within the specified time frame for disputes.

10. Card-based travel insurance has its limits
The same goes for travel insurance. The Financial Ombudsman Service says it’s crucial to obtain a copy of the policy wording and read it carefully to see that it meets your particular needs – such as covering existing medical conditions.

You also need to ensure you’ve done everything to ensure the cover is activated.

For instance, you may need to pay all or a specified amount of your travel costs with your card to qualify.

(C) Lesley Parker 2010