Why you could pay a high price for not knowing what your life insurance policy covers

A ruling by the Australian ­Financial Complaints Authority has illuminated the hazards of being unaware of the fine print in life insurance policies. Here’s what you need to know.

Many people think they are adequately covered by their policy only for there to be a rude shock when it comes time to claim.

A ruling from the Australian ­Financial Complaints Authority brings to light the complexity of life insurance contracts and the need for consumers to “read the fine print”.

In what may not come as a surprise to some, an insurance company refused to pay a claim and it was only after it was escalated to an external complaints authority that the decision was overturned and the benefit paid.

This is what happened and what you need to know to avoid ending up in a similar position.

The claimant was an auto mechanic who suffered serious ongoing injuries as a result of a 2006 car accident. The mechanic’s left leg and foot was affected and after the accident he was unable to kneel, squat, or bear weight effectively on this leg.

In 2016, the mechanic put in a claim with Zurich against his superannuation-owned Total and Permanent Disability (TPD) policy that was assessed and rejected by Zurich. Although Zurich acknowledged that the mechanic could not go back to his usual job, it argued that he could find another job that was suitable given his education, training and experience such as a service adviser or delivery driver.

When the mechanic lodged a case with AFCA, run by chief executive David Locke, it ruled: “A fair reading of the evidence before AFCA is that, as at the end of the six-month period on April 4, 2007, the complainant was unlikely to ever be able to engage in any occupation for which he was reasonably suited by his ETE (education, training and experience).” The ­applicant was awarded the TPD benefit as well as interest on the benefit backdated to March 2016.

There are several simple things you can do to reduce the chances of an unpleasant claim surprise:

● Do not pick a life insurance policy purely based on price, although a competitively priced premium is important.

● Compare policy wordings from different insurance companies on how they assess claims by reviewing their Product Disclosure Statements (PDS).

● Review insurance quotations and make sure you have understood and decided upon each specific policy option you can choose from, such as indexation, benefit type, replacement ratio and reinstatement clauses

● Several insurance companies give premium discounts of up to 20 per cent if the life insured is healthy, measured by a BMI within a certain range or undertaking certain health activities.

● The longer your medical history, the more difficult getting an underwritten life insurance policy will be.

Do you have enough life insurance?

Sydney-based financial planner Daniel Corbett from King of the Mountain Financial Advice says: “I meet a lot of people who think they are adequately covered by an automatic life, disability or income protection insurance policy received as part of on-boarding with an industry super fund.

“However, with the complexity of life insurance contracts, what you think you are covered for can be very different to what you are actually covered for.”

The mechanic held a TPD policy that provides a lump sum generally after someone has been unable to work for six months, has also been under medical care under that whole period and finally after two doctors are willing to certify that the policyholder is unable to ever go back to work again.

Australian ­Financial Complaints Authority chief David Locke. Picture: Stuart McEvoy

But the catch in many cases as to whether the TPD pays out is based on the selected definition of disability, which will be either “any” or “own” occupation.

The weaker variant, “any” occupation, is the default offering on most super-linked life insurance policies and provides the insurance company with a potential avenue to reject claims. In simple terms, although you might not be able to do your specific job, if the insurance company determines that you can still do a lesser job that you are reasonably suited to by education, training and experience, it may have grounds to reject the claim.

Corbett says: “For people with specific or high-income occupations such as surgeons, professional athletes, tradespeople and management professionals, ‘own’ occupation coverage under TPD is generally advisable.”

A similar problem can occur with income protection insurance policies. After the government forced life insurance companies to water down their loss-making income protection policies several years ago, the resulting income protection products now also have the “own” versus “any” definitions attached to their policy wordings.

As an example, if an accountant suffered mental health issues and could not perform the regular ­duties of their accounting occupation, the “own” occupation version of an income protection policy would start to pay a monthly benefit of up to 70 per cent of the accountant’s pre-disability income after the waiting period has been served. But had the same accountant taken out an “any” occupation income protection policy, the insurer may deny the claim if it determined the ­accountant could still work in a less stressful role such as an ­accounts assistant.

James Gerrard is principal and director of planning firm www.financialadvisor.com.au