Personal insurance premiums have increased significantly over the past 18 months, running the risk that cost-conscious consumers might consider cutting back their cover. Suddenly those quick, off-the-shelf insurance products advertised on TV look enticing.
But simple is not always cheaper, the cover may be inadequate or, worse still, may not pay out when you need it most.
Personal insurance is a general terms for term life, total and permanent disability (TPD), trauma and income protection insurance.
The reality is that even those people who think they are covered are likely to be underinsured. According to Rice Warner, the average Australian couple aged 40 with two children requires life insurance cover of about 10 times annual earnings to repay debts and maintain current living standards.
Yet the median level of life insurance cover across the working age population is only 42 per cent of the amount needed to fully maintain the standard of living of family members. Median levels of TPD and income protection cover are even lower, at 14 per cent and 16 per cent respectively.
Life insurance lite
Life insurance is sold through three main channels: your superannuation fund, financial advisers or direct from the insurance company.
Direct life insurance generally offers pared-down (‘lite’) products sold without comprehensive financial advice and often with little or no underwriting. It is marketed to consumers via daytime TV and radio advertisements, direct mail or over the phone.
Consumers are often attracted by the simplicity of direct life insurance and offers of ‘no blood tests, no medical tests’, believing that it will be cheaper than going to an adviser. But medical checks are designed to help insurers evaluate the risk of insuring you, so if you are low risk you will be rewarded with lower premiums. This is the process known as underwriting.
The benefits of underwriting
To take out fully underwritten life insurance you must fill in a health and medical questionnaire and sometimes undergo some blood tests – at the insurer’s expense. The insurer will often write to your doctor. If you are young, healthy and in a low-risk occupation you are assessed as lower risk to the insurer than someone who is overweight, a smoker and employed in the building industry, for example.
The key to buying any life insurance is to find out exactly what you are covered for, how much the insurer will pay out and how much you will pay in annual premiums for the benefit.
Say someone hurt their back 18 months ago and spent time off work but hasn’t had any serious back issues since. If they applied for income protection insurance, insurers would generally exclude a payout as a result of the pre-existing back problem. However, a fully underwritten policy would allow the underwriter to write to the applicant’s doctor to understand the scope of the previous problem, with a view to reviewing and possibly removing the exclusion.
Avoid low payouts
What’s more, the maximum sum insured by ‘lite’ products is generally capped, compared with no maximum for advisor-authorised products.
Where there is no underwriting, no questions are asked. Premiums are often higher, there are generally more exclusions and at the same time the maximum sum insured is often lower. There may be accident-only cover for the first few years or no terminal illness benefit to avoid people taking out life insurance if they suspect they are seriously ill.
The best way to avoid any nasty surprises is to take out personal insurance when you are young and healthy. The premiums are ‘guaranteed renewable,’ meaning any changes in health that occur after the insurance is taken out won’t result in denial of cover, premium increases, or exclusions.
Please don’t hesitate to contact us if you would like to discuss your current or required insurance needs.