Why you need to do your homework and keep up to date on life insurance
Taking out a life insurance policy is now more complicated and no longer a ‘set-and-forget’ exercise.
If you are taking out a life insurance policy, most people are primarily after two things – cheap premiums and strong policy terms. However, not many think about what happens 12 or 24 months down the track with regard to rising premiums and problems at claim time.
The Australian Securities and Investments Commission and the Australian Prudential Regulation Authority recently issued a joint warning shot to all life insurance companies – multiple premium increases for existing customers over several years have not gone unnoticed.
The regulators noted that of the 16 life insurance companies that operate in Australia, 13 increased their base premiums at least once over the past seven years and almost half lifted premiums four times or more over that same period.
This finding from the regulators means that the process of taking out a life insurance policy should have more rigour than in the past. Not only should you consider the pricing and terms of a life policy, regard should be given to the history and stability of the insurer to avoid nasty surprises in the future.
To do this, you need to research the track record of the life insurance company and assume that premiums may rise substantially, analyse the likelihood the company will get acquired by a competitor who may change the pricing, and check whether the life insurer has a history of closing products and offering a new product on better terms to new customers, to the detriment of existing policyholders.
In their joint letter, the regulators suggested: “Life companies should improve their product governance. They should start by considering consumer needs, including premium stability. Premiums should be aligned to the risks borne by the life companies, noting that these are products designed to be held long term.”
And it is not just the life insurers you need to do your homework on, keep in mind future potential legislative changes that may impact life insurances.
The life industry has undergone significant change over the past three years. The most notable has been the APRA-enforced changes to income protection policies.
After years of life insurers underpricing income protection policies to beat out the competition and gain market share, APRA saw the writing on the wall after $3.4bn of losses from life insurers over a five-year period and pre-emptively took action in an attempt to avoid life insurers going bust.
While this change worked and brought stability and profitability for life insurance companies, the industry has gone from one extreme to the other. A decade ago premiums were unsustainably low whereas today consumers are seeing premiums increase well beyond inflation and by up to 300 per cent at renewal time.
If you have one of the pre-2020 grandfathered income protection insurance policies you are likely to have better policy terms than what is available today.
Older policies were able to be structured with more features such as agreed value. With an agreed value policy, if employment income has dropped since the original insurance application form, it is actually possible to get more than 100 per cent of your pre-claim income paid as a monthly insurance benefit.
Today, income protection policies are only offered under indemnity terms which mean that the insurance company will look at your income for the 12 months prior to a claim, and if income had dropped compared to income at the time of the original application, your monthly benefit payment is likely to be reduced.
For people who are self-employed and have variable incomes, if they have a bad year financially and then make a claim, what they thought they might be able to rely on from the income insurance may not come through under today’s income protection insurance policies.
Another important consideration for income protection policies is the more complex treatment of what actually constitutes a claim. Under the older-style policies it was relatively straightforward – if you are unable to do one of the income-producing activities of your occupation you would receive a payment.
But under the new policies there are two definitions of disability to deal with. “Own” occupation provides a stronger benefit and if you cannot do your specific job, you qualify for a claim whereas under the weaker “any” occupation policy, it will not pay if you can still work in another lesser job that you are reasonably suited for based on education and experience.
This is where reading the fine print is important. Some insurance companies will offer the stronger “own” occupation income protection insurance for the first two years of a claim then revert to the weaker “any” occupation after this and the claim could stop.
Other insurance companies offer the stronger “own” occupation for five years which is preferred, but will result in a higher premium attached to the policy.
No longer is getting life insurance a “do it once, do it right” exercise. What might be the cheapest life insurance companies this year may be the most expensive policy next year.
In addition, life insurance benefits and features have gone through lots of changes in recent years and need ongoing monitoring to see if it is worthwhile jumping to another insurer for a better policy.
James Gerrard is principal and director of Sydney planning firm www.financialadvisor.com.au
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