The royal commission into banking and financial services has exposed so many egregious practices across the life insurance industry that many policy holders are deeply concerned about what their cover will provide if they have to make a claim.
Some life cover, total and permanent disability (TPD), trauma and income protection policies have been revealed as shocking rip-offs where the odds of making a successful claim are stacked in favour of the insurer because of complex legal jargon, unfair exemption claims and lack of transparency.
It has also revealed profit-hungry providers using cash and other incentives, including hefty commissions and overseas holidays, to flog policies.
Wondering whether your policies are worth it? Work though these 10 questions to help you come to a decision.
1. Are you paying for multiple life insurance policies?
Thousands of consumers are paying for more than one life insurance policy without realising, wasting an estimated $2 billion a year on extra premiums, according to the Productivity Commission. That’s because they have cover in the default super from their employer but have also been sold separate insurance policies.
An employer’s default super will generally provide death and total and permanent disability (TPD) cover, which pays a benefit for serious injury preventing future work.
A superannuation fund’s website will have a product disclosure statement identifying the insurer and cover. The annual super statement should explain the type of insurance cover, how much you have and how you are paying.
“Direct life insurance” is sold without advice and outside the fund, typically online or over the phone.
The commission was told insurer and wealth manager ClearView broke criminal law more than 300,000 times when it “cold called” consumers to hawk insurance products. Under Section 992A of the Corporations Act insurers are prohibited from making unsolicited sales calls, which means cold-calling consumers and harassing them into insurance they don’t want or need.
The Australian Securities and Investments Commission (ASIC) warns that many people do not understand the life product they buy and are at high risk of getting cover they cannot afford, duplicate cover or a policy that is not right for them.
For example, Freedom Insurance sold an injury and life insurance policy to a man with Down syndrome who did not understand what he was buying, according to the commission.
Watchdog ASIC found many direct buyers cancelled their policies during the cooling-off period.
2. Do your premium costs align with your cover?
Insurance offers an “uncertain promise of financial support” in the future, says Steve Mickenbecker, a group executive with Canstar, which compares costs and fees of financial products. That means great care is needed to ensure too much is not paid and that premiums are providing the right cover.
“As with other product lines you never want to pay too much,” says Steve Mickenbecker, a group executive with Canstar, which compares costs and fees of financial products.
“But with insurance, even more care is necessary,” he says, adding that insurance is not a product that should be bought solely on price. “The detail of the product is where the message is, and this is very difficult for consumers and may require independent expert advice.”
The difference between the highest and lowest premiums is biggest for income protection and trauma cover, which provides cover if diagnosed with an illness that has a significant lifestyle impact, such as cancer or a stroke. It is sometimes called “critical illness” or “recovery insurance”.
For example, monthly premiums for the most expensive annual policy providing $750,000 of trauma cover for a 32-year-old female are about $218, or about 2.5 times the cheapest. The average is about $140, says Canstar.
For a 52-year-old male the dearest is about $1000 a month, or more than 40 per cent higher than the cheapest. The average is $840.
3. What is covered?
The commission provided several shocking examples of policies falling short of best practice. This was often because buyers were flogged cover by sales staff of insurance companies
ClearView used “emotional” pitches to sell policies to poorer customers – often to those who could not afford the policies – and used “rational” pitches to wealthier people, according to evidence given at the commission.
Consumers should not feel pressured to make a quick decision. Request the product disclosure statement and time to consider the product.
Before committing, make sure of the events or illnesses covered by each type of insurance, the level of cover, the ongoing cost, how medical history might affect the policy and any exclusions.
Make sure to ask what the premiums cost now and in the future. Are stepped or level premiums best? Stepped premiums increase each year depending on age and the policy, while level premiums do not change but are generally more expensive at the outset.
4. What is excluded?
The chief medical officer of the Commonwealth Bank of Australia’s insurance division rejected trauma claims based on a heart attack definition that was five years out of date, the commission was told.
Insurer TAL voided a cervical cancer patient’s income protection policy because she had not declared an alleged unrelated history of depression, the commission was told.
A young woman who fell five storeys and became a paraplegic had her insurance policy turned down by super fund REST and its group insurer, AIA, based on a technicality. The insurance cover in her account had lapsed because her balance had fallen below a threshold of $3000.
Beware of shortcuts when taking out a policy, warns ASIC, particularly with direct cover.
Not having to provide medical details to get cover could mean the product has more exclusions and, in the event of a claim, could lead to delays and problems.
Check the insurance provider’s website or product disclosure statement to find out if the policy covers pre-existing medical conditions. If so, the relevant details need to be provided or the policy may not pay out on a claim.
If in doubt, contact the provider and ask for a written explanation.
5. Is there a risk loading?
Risk loadings are what insurers use to determine how risky you are to insure.
“They can have a huge impact on cost,” warns Xavier O’Halloran from consumer group Choice.
ASIC warns some super funds are automatically classifying some scheme members as smokers or blue-collar workers unless “specific information to the contrary is received”.
This results in members being considered higher risk and being charged higher premiums.
For example, an AMP non-smoking super fund member was charged excessive premiums of up to $72,000 as a smoker because his monthly premiums jumped from $206 to $1600.
It followed his move from an employer-sponsored AMP fund to a different product.
“Check your risk loading,” warns O’Halloran. “These can strip tens of thousands from your retirement nest egg.”
Refer to the product disclosure statement or the provider’s website for more details about any loadings.
6. What do income protection and trauma insurance cover?
Trauma cover provides a lump sum upon diagnosis of an illness that has a significant impact on the policy holder’s life, such as cancer. But there are set definitions as to what is covered so don’t assume your policy covers you for all events. Failed claims can be particularly galling with trauma as the premiums are significantly more expensive. Also watch out for procedures in the small print that are not covered.
Income protection replaces some of your income for an agreed period of time if you are unable to work due to injury or sickness. Premiums can be cheaper if there is a longer waiting period – say three months. But you’ll need to ensure you have adequate funds to cover that time if you are unable to work and have to wait for the cover to kick in. Check whether you’re covered under “own” or “any” occupation – if the latter your claim could be turned down if you’re unable to return to your own job but could find other work.
TAL told the commission about cases where it frequently tried to deny income protection insurance claims by “bullying” and “intimidating”. It also admitted to a lack of empathy in another case where the claimant had cervical cancer.
A nurse suffering anxiety was hounded by TAL case officers, including tracking her with a private investigator.
“There are lots of rules and definitions to be aware of,” ASIC says in terms of what these policies do, and don’t, cover.
“You need to tell your insurer anything that could affect their decision to insure,” ASIC adds. “You also need to tell the insurer about things that have happened between the time you apply and when the insurance cover starts.”
Buying specialist cover through your super may be cheaper. Some schemes automatically offer disability as well – worth bearing in mind if you’re considering income protection and/or trauma. Check the member statement, ring or email the fund or read the product disclosure statement.
Income protection policies vary widely. For example, one insurer has four different levels of cover at different premiums.
“They cover you for significantly different risks,” warns Canstar’s Mickenbecker.
“The difference between highest and lowest premiums is most marked for income protection and trauma products,” he says. “This is not surprising as it is where the products are most differentiated. It contrasts with term life cover, where death does not allow for marked differentiation.”
For example, a 32-year-old male wanting $6250 a month income protection for two years with a 30-day waiting period will pay $31 a month for the cheapest policy, or nearly four times less than the most expensive. The average is about $78.
A 52-year-old woman seeking the same cover will pay $171 for the cheapest, $398 for the most expensive and $280 for the average cover, according to Canstar.
7. How much life insurance do you need?
Freedom Insurance told the commission its sales force was offered trips to Bali and cash incentives to flog its policies. Agents were told to deal with people’s objections and concerns “until with exhaustion, they signed,” it was told.
A typical benchmark to work out how much cover a family would need is to estimate the mortgage and other debts, child care, education and living expenses. Then estimate what support a family might be able to provide from superannuation, shares, savings and existing insurance polices.
“The difference between these two is the amount of cover you should get,” says ASIC.
Choice recommends your annual salary multiplied by 10. Australian Super suggests the CIMER template: cleaning up short-term expenses; income (a lump sum to prove income for the family; mortgage (enough to repay it); education costs; and retirement funding for your partner.
There are online insurance calculators to assist calculating required cover. A licensed financial adviser can also help choose the correct policy. Check whether the adviser is being paid a fee or commission from the recommended product provider.
For example, an adviser for BT, a division of Westpac Group, encouraged his client to take out BT life, TPD and trauma insurance policies and cancel existing life insurance policies through super. The adviser stood to gain a bonus of up to $3878 in initial commissions and $352 every year after that in ongoing commissions.
8. What does TPD cover?
Small print clauses relegate many policies to junk insurance because it is almost impossible to meet the criteria, despite claimants being unable to work, the royal commission was told.
Commonwealth Bank’s Colonial First State rejected a claim by Amber Lomax, a single mother of two boys, aged 12 and 15, because she was a casual rather than full-time employee, the commission was told.
Lomax, who survives on Centrelink and food banks, did not know life insurers assess casuals for TPD more harshly than permanent workers. The insurer was sold by CBA last year.
Other claimants with professional backgrounds were rejected by insurers because under strict exclusion terms they might have qualified for low-skill, menial work that could be performed by mentally impaired or disabled workers.
9. Insurance default schemes – do they meet your needs?
About 70 per cent of all life insurance policies in Australia are held through super funds, where cover is provided to members on a default opt-out basis.
It has been an enormous money spinner for the life insurance industry, which earns about $13 billion worth of policy premiums each year from savers, who are often unaware they are paying for the cover.
A recent survey showed 24 per cent did not know if they held insurance through their super.
Life insurance offered by super is often cheaper than through retail providers, but it is necessary to shop around to find the right policy that suits individual needs.
“Insurance in super is offered by default, so it might not be tailored to your needs. For young people with no dependants you may find you’re over-insured and the cost of insurance premiums can really hurt your fledgling super balance,” warns Choice’s O’Halloran
When should cover be reviewed?
Policies should be reviewed as income and personal circumstances change to make sure the cover is updated and comprehensive.
Older employees who have paid off their house and whose children have left home might decide to cut their income protection or life cover.
The key issues are whether the new policy will provide the same level of cover and is that the amount required to meet current and future needs.
Also, what is the waiting period needed to apply for difference types of benefits. A waiting period is the time before a claim can be made. It is typically 30 to 90 days.
Advisers recommend reviews after a major ‘lifestyle event’ such as a new mortgage, marrying or having a baby. Check with the new fund about its requirements. Usually a new insurer does not require a full health check if the old insurer assessed the applicant’s health within the past five years.