Editor’s note: This article contains information only. It is not intended as personal or general advice.
The royal commission has revealed some terrible stories about life insurance, and there is no excuse for them.
There is clearly a lot of work to do to improve products, services and ethics.
But that shouldn’t put you off life insurance and it shouldn’t put you off getting advice about your life insurance needs.
There is still no better or more affordable way to protect yourself and your family from the financial distress of death, long term sickness, accident, total and permanent disablement or a major traumatic medical event than life insurance.
Despite all the bad news you’ve heard, statistics provided by the industry to the royal commission reveal that:
• Only 1.7 per cent of life insurance claims are declined, meaning 98.3 per cent are paid.
• Only 3 per cent of income protection claims are declined, therefore 97 per cent are paid.
• Decline rates for total and permanent disability claims sit somewhere between 2 per cent and 10 per cent, which means 90 per cent or more are paid.
• 1 in 10 trauma claims are declined, therefore 90 per cent are paid.
In 2016, the industry paid out over $9.2 billion in claims to over 108,000 people, equating to over $26 million per day in lump sum payments.
Like many products these days you can buy life insurance direct online or over the phone.
You can also obtain life insurance via a licensed financial adviser.
Many of the poor examples you have heard about from the royal commission resulted from products sold by direct outbound call centres.
Contrary to popular belief, many of these products are more expensive, provide fewer benefits and have lower payout rates than products offered through a financial adviser.
The royal commission has highlighted the issue with direct insurance and is expected to make recommendations to better protect the consumer.
Many people may also have automatic life insurance through their superannuation fund.
However, as this insurance has not been arranged to suit your specific needs, it may not be enough to protect you and your family, and it might not include the type of insurance you need.
Statistically, life insurance through an adviser is estimated to have provided 70 per cent of claim payments and accounted for 50 per cent of premiums paid.
What do life insurance advisers do?
Life insurance advisers review your personal circumstances and consider the impact that your death, disability, medical trauma or long-term illness might have on your family finances.
Equipped with this knowledge, they can then make recommendations for the amount and types of cover that are appropriate for your specific needs.
Advisers can access and recommend the product structure, type, benefits and amount of insurance best suited to your needs and they monitor and adjust them, according to your changing lifestyle.
Advisers are also there for you at arguably the most important time – when you or your family have to make a claim.
The main criticism levelled at life insurance advisers is that they are paid commissions for selling life insurance products.
However, commissions are one of the mechanisms that make life insurance advice and the sourcing of appropriate product solutions affordable.
The cost of providing advice is spread over the cost of the product, it is not hidden and must be formally and fully disclosed. The insurance will not be put in place and no premiums will be payable without your agreement.
The alternative to commissions is paying an upfront fee for insurance advice.
This would be in addition to the cost of the insurance premiums. While removing commissions would reduce the cost of the premiums by around 20 per cent, the fee for advice could be as much as twice the cost of the annual premium, which would ultimately make the cost of advice more expensive.
Life insurance provides funds at times of need to those who are sick or injured, or to families whose loved ones have died.
These insurances help pay mortgages, medical bills, subsidise lost income, fund school fees, and so on.
Not only does this take the burden off the government, which may otherwise be expected to financially support these people, it also provides financial stability and dignity to Australians when they are at their most vulnerable.
These emotional and psychological benefits are the least spoken of but are perhaps the most potent.
It is important that the industry learns from its mistakes, strives for better outcomes and rebuilds consumer trust.
But this should not detract from the reality that that there is no more cost efficient or effective way of protecting individuals, families or businesses against significant traumatic events for all Australians in their time of need.