Life insurance and financial services are very much in the spotlight at the moment. The controversy can make it easy to overlook the very real benefits that life insurance provides. The following can help advisers in the life insurance space help their clients navigate this sometimes complex world.
We tend to think of life insurance as a payment made to a beneficiary upon death. However, the category of insurance commonly referred to as ‘life insurance’ provides a number of different types of cover: death cover, total and permanent disability (TPD) cover, trauma cover and income protection cover. The key features of each are as follows:
Also known as ‘term life insurance’ or just ‘life insurance’. Death cover pays a benefit upon the death of the insured person. This amount can often also be paid out before death, where the insured person is terminally ill. The benefit is paid to the beneficiaries nominated within the policy or to the estate. Where this cover is held within superannuation, the trustee of the fund can have input as to who receives the benefits.
TPD insurance covers the cost of rehabilitation, debt repayment and the future cost of living if the insured person is totally and permanently disabled and unable to work.
The intention of this benefit is to pay an amount when a person will never ever work again. However, whether or not a client is deemed totally and permanently disabled depends upon the definition within the policy. These can vary from policy to policy, but usually fall into two categories:
Trauma insurance provides cover where a person suffers a specified illness or injury, for example cancer, a stroke or a broken leg. Trauma insurance is also referred to as ‘critical illness’ or ‘recovery insurance’.
This cover pays a set amount, sometimes dependent upon the severity of the illness or injury – for example, the benefit would usually be larger for a severe stroke as opposed to a broken leg. The benefits are intended to cover items such as medical costs (over and above what health insurance will pay), an income stream if it is not possible to work, and the on-going cost of therapy and/or transport costs, as well as adjustment to housing and repaying debts.
Income protection insurance replaces income lost through an inability to work due to injury or illness.
Income protection insurance can differ widely, and each policy will have its own definition of disability and range of benefits. In general terms there are two types of cover – one that pays an indemnity benefit, or what you are earning at the time of the claim, and a second which pays an agreed value, determined when you apply for the cover.
The maximum covered is typically 75 per cent of gross wages. The benefit is deliberately designed to be less than 100 per cent of wages, to encourage people to return to work. Benefits are paid until recovery, up to a maximum time period, defined as a number of years, or until the person reaches a certain age.
Australians can access life insurance in three ways, and as a result, the industry is split into three distinct channels as follows:
Individual insurance policies purchased through an adviser (either a financial adviser or a risk adviser) are known as retail insurance. It is also known as advised insurance, because it usually involves the client seeking advice prior to purchase.
Detailed health information is provided in order to take out the cover, and the price will be in some part dependent upon the risk the individual represents – due to their health, pastimes and occupation.
Group insurance is where multiple people are insured under a single contract. These ‘groups’ are usually employees of an employer or the members of a super fund.
Group insurers do not collect detailed information on each person insured, but rather make assumptions about the occupations and health of the group as a whole. As a result, group insurance can often be cheaper than retail. Due to the lack of individual risk rating, this type of insurance is advantageous for people who may not be able to obtain retail insurance – such as those in high risk occupations or with serious pre-existing health conditions, who may be denied cover during the retail underwriting process.
Life insurance purchased through a superannuation fund can however be less comprehensive than that purchased directly.
Life insurance purchased directly through an insurer is known as direct insurance. This kind of insurance is sometimes referred to as non-advised, because no personal advice is given. This type of cover is often purchased over the phone, via either inbound or outbound calls.
For this reason, direct policies tend to be simpler.
Life insurance is an essential pillar of a financial plan, particularly for families, because most of us would struggle to pay our bills if we found ourselves unable to work, due to illness or injury. Yet despite the fact that 94 per cent of working Australians have some level of death cover (usually through their superannuation fund), the amount is often woefully inadequate. The same goes for both TPD and income protection cover.
In its latest research into life insurance cover in Australia, Rice Warner estimates that the insurance needs of a 30-year-old couple with children are:
The reality is that median levels of death cover in Australia are around only two times family income. TPD cover rates are around three rather than four times family income, and income protection cover is usually 75 per cent of income.
This means that if the average Australian were to claim on their death cover, less than half of their family’s basic needs would be met, and they would receive less than 30 per cent of the amount required by their family to maintain their standard of living.
A common misconception in the market is that life insurance is unnecessary, because health insurance provides the same cover.
While health insurance covers certain healthcare costs, including doctors’ expenses, the cost of going to hospital and some medicines; it does not cover other living expenses. This is where life insurance comes in. Living expenses do not stop, and more often than not they can increase, due to the need to bring in outside help, when someone is ill or injured.
Peoples’ knowledge about insurance is also generally low, making purchasing decisions without help difficult.
Financial advisers are frequently on the front line – dealing with clients of a daily basis, and in a position to educate them about the options available to them, and to guide them as they make more informed choices about financial protection. Bringing this topic to the forefront of discussions is therefore a key part of an adviser’s role.
Navigating the complexities is the other key role for an adviser. Understanding what is and isn’t covered, what is excluded and included, and even how much is needed is challenging for most clients. Policy conditions and features are (by necessity) covered in detail in a Product Disclosure Statement (PDS). However, many life insurers are not great at presenting the information in an accessible way. Most life insurance PDSs are dense, lengthy and complex documents, and make understanding and comparing products difficult.
There are a number of key changes that could affect your clients’ cover over the next few years. Awareness of these changes can help set up your clients to weather the upcoming storm.
In May 2018, then Treasurer, Kelly O’Dwyer, announced a range of measures that would reform insurance within superannuation. While the changes are not yet law, they have the potential to affect the level of cover that super fund members receive and may mean that some are left underinsured or need to look at their options for a policy outside super.
The key change is that insurance within super will become opt-in (rather than default or opt-out) going forward, for members:
For members with account balances under $6,000 and those with inactive accounts, cover will be removed (if they don’t elect to keep it in writing) when the changes are implemented. Ongoing, all types of cover (voluntary and default) will be removed where a members account becomes inactive. The start date of these changes is unclear.
These changes will have unintended consequences for younger members who do have families that need the support of insurance cover, and those who may be unable to get opt in cover due to higher risk occupations or health issues. Exemptions for members in these situations have been requested by various industry groups but may or may not eventuate.
In December 2018 the Productivity Commission released its final report on the efficiency of Australia’s superannuation system. The report included recommendations for the way insurance inside superannuation is managed, as well as who is insured through their super. Key findings included:
The Productivity Commission recommended:
On Friday 2 February, Commissioner Kenneth Hayne delivered his final report and recommendations on the Banking Royal Commission, following his year-long review of the financial services sector, including life insurance. These findings were released on 4 February.
The recommendations on life insurance included:
There are many questions which need answering before you can be sure you have recommended the right insurance cover for your clients. Key questions are:
Suzie Brown is general manager for distribution at Integrity Life.
Sick of it. Canberra is a joke....
This is really concerning.... C'mon Canberra, sort this nonsense out. ...
It just never ends. No wonder financial planners have horrible mental health - every time they say "don't worry, there's...