15 May 2015
While most people would never consider driving a car without motor insurance, less than a third of Australians insure their most important asset – themselves and their ability to earn an income.1
Unfortunately insurance can never remove the risk of something going wrong! It will however, provide Australians and their families with protection, compensation and financial security if something did happen.
Personal insurance is a general term for Life, Total and Permanent Disability (TPD), Trauma and Income Protection insurance.
Facts and figures
In 2014, AIA paid out over $860 million in claims – that’s over $3.4 million every working day. In the same year, AMP paid more than $888 million in personal insurance claims, TAL paid out over $947 million and OnePath over $638 million.2
Heart disease and cancer continue to be two of the leading causes of death in Australia.3 One of the oldest claimants was 101 years old (OnePath Life) and one of the youngest claimants was 12 years old (AMP Life).
Top 5 causes of Death claims paid out in 2014
Most common claims from Australian women suffering cancer in 2014
Income protection claims by age (2014)
Here are a few things you need to know about personal insurance to assist you as you work with your Financial Adviser to make the right decisions as you plan to protect yourself and your family.
The risk of underinsurance
The reality is that even those people who think they are covered are often 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.4
Yet the median level of life insurance cover across the working age population is only 42% 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% and 16% respectively.
Beware of ‘lite’ products
Direct Life insurance offers generally provide a limited feature, limited sums assured (‘lite’) product, and as a result are often sold with little or no underwriting – with the consumer attracted by the ease of application and limited or no requirements for blood or medical tests. This can lend itself to pre or existing conditions being excluded at the time of a claim and levels of cover that fall well below that which is actually required.
It is worth remembering that 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 and importantly, levels of cover which actually meet with your needs. 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 blood tests (all 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 a lower risk to the insurer than someone who is overweight, a smoker and employed in a more physical/manual occupation.
The key to buying any Life insurance is to find out exactly how much you need, and then to understand what you are covered for, how much the insurer will pay out and how much you will pay for the benefit.
For example, 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, without underwriting, insurers would generally exclude a payout as a result of the pre-existing back problem. But with a fully underwritten policy, it 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 adviser-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.
1 www.lifewise.org.au 2 https://www.amp.com.au/personal/insurance/products/insurance, http://www.tal.com.au/TAL-News-Centre/Media-Releases/2015/April/27/TAL-life-insurance-payouts-hit-almost-$1-billion-a-year, http://www.ufp.com.au/files/15-04-13%20AIA%202014%20Claims%20Brochure%20.pdf, http://www.onepath.com.au/personal.aspx 3 http://www.abs.gov.au 4 Rice Warner, Underinsurance Research Report, 2 December 2013