Insurers need to reach into their own pockets to address underinsurance, writes Tim Browne.
People rarely want to discuss life insurance, because it forces them to consider the unthinkable: the death or permanent disability of a loved one.
As a consequence, just 4 per cent of Australian families with dependants have sufficient cover to protect them if such an event were to occur.
The unfortunate fact is that one in five Australian families will experience a premature death or a serious health problem.
Adding to that burden, the cost of raising two children at Government schools plus three years of university is around $537,000 – and many Australian families with young children already have substantial debt obligations that need to be managed on top of that.
Addressing the underinsurance gap is undoubtedly a challenge, but it is one that the financial adviser network is working to address by raising awareness of the need for cover and ensuring that individuals and families have the right level of protection at each stage of their lives.
There are a range of circumstances that change a person’s insurance needs.
For example, young adults still living with their parents have very different needs to a couple with two children and a mortgage.
Therefore, whenever a significant change occurs – including marriage, mortgage, birth of a child or loss of an income – life insurance needs must be reviewed. Those who take a ‘set and forget’ strategy run the risk of being left with inadequate or inappropriate cover.
In addition to the ‘set and forget’ approach to insurance cover, there are two other reasons the underinsurance problem exists: the perceived costs, and the effort associated with changing a policy.
Many individuals and families are concerned that a change in their situation will result in a substantial premium increase, yet adequate levels of term life insurance for the average working Australian cost the same as a daily cup of coffee. In addition, people believe that revising a policy is a particularly time-consuming task (and to be fair, this has traditionally been the case).
This type of change has required financial advisers to invoke a future insurability clause if the life insured has experienced one of the pre-defined events: written an additional policy for the increased sum insured, or cancelled the original policy and rewritten a new one.
All of these options take time and effort, and all of them have limitations:
- The future insurability clause is terrific if the client has met one of the pre-defined events stipulated in the contract. Unfortunately, life is not that predictable – and the need for additional life insurance may be predicated by a number of additional factors not listed in the policy document;
- Writing an additional policy often involves questionnaires, blood tests, medicals and reports from doctors – all activities that an individual would have completed when they took out their original policy; and
- Replacing an existing policy requires the adviser to justify the replacement, which often involves a comparison of benefits, features, premiums and the claims-paying ability of the original and replacement policies.
Addressing the underinsurance problem that currently exists in Australia requires a three-pronged solution. We must continue to educate the community about the importance of life insurance, including the need for the right cover at all stages of life.
Financial advisers also need to continue actively managing their clients’ needs by reviewing their coverage regularly to ensure their insurance remains relevant at each stage of their life.
And finally, insurance companies must make it easier for a client to amend their cover when their situation changes.
Tim Browne is general manager, retail advice at CommInsure.
