Good health at a premium: How Covid is going to affect your life insurance

Higher fees and tighter restrictions are coming as life insurers tackle Covid-related expenses so watch out, SMSFs.

Insurers are more conservative when taking on new policies, noting the effects of Covid. Above, a Covid pop-up testing clinic in Sydney. Picture: NCA NewsWire / Flavio Brancaleone

The fallout from the pandemic continues to affect investors in ways we probably did not anticipate from the outset.

One such knock-on effect has been felt in the life insurance industry. Covid has changed the way insurance companies are assessing life applications.

But more than that, they are forecasting on the medium to long-term financial impacts of ongoing Covid variants and starting to increase premiums in anticipation of rising claims.

Last year, Australian life insurers set aside more than $1.5bn for Covid claims and are expecting worsening profit margins. This translates to higher premiums for policyholders as the life insurance companies pass on the costs to their customers.

In terms of where the Covid claims are expected to come from, it is not just death payouts from people who have succumbed to Covid that are of concern. Other types of policies are expected to see an increase in claims.

Throughout the pandemic, many people have not gone to the GP to check up on the little things they should and instead focused on trying to avoid Covid.

As such, insurance companies are concerned about a build-up of medical issues that have now passed the early diagnosis period and may result in a higher than ­average level of cancer-related claims on trauma policies in the next few years.

Income protection insurance is another area where insurers expect to see more claims. Anecdotal evidence shows that Covid has led to a spike in income protection claims.

In more than 15 years of advising clients on insurance, I saw more income protection claims from my clients in 2021 compared with the cumulative amount of claims over the previous 15 years.

Covid has been indiscriminate and financially devastating for so many.

For no fault of their own, business owners and staff in the hospitality and tourism sectors saw their incomes drop to zero almost overnight as restrictions came into play. Although there were government assistance programs in place, in many cases this was not sufficient to pay all the bills and keep the lights on.

In addition, a whole sector of white collar independent contractor professionals saw their contracts terminated as businesses went into a “Covid hibernation”.

Although redundancy and business closure is not a direct trigger for an income protection claim, many people suffered mental health issues as a result of Covid stresses and, as such, were able to make claims on their income protection policies.

So what does this all mean for the average person wanting to take out a life insurance policy in today’s market?

To begin with, the cost of the policy is likely to be higher than a few years ago, as we have seen two years of double-digit premium ­increases across the board from insurers.

Insurers are also more conservative when taking on new policies these days, noting the health and mortality issues caused by Covid.

Although not outright rejecting people who have been diagnosed with Covid, the insurers are putting waiting periods of between 30 and 365 days where an application needs to be symptom-free before they can apply.

This may start to become an issue for the 1.1 million SMSF trustees who are required to assess the adequacy of life insurance arrangements for members on an annual basis.

For an SMSF trustee wanting to take out immediate life cover for a member, where the member has been diagnosed with Covid (and especially if they have long Covid symptoms), availability of coverage is likely to be delayed for a significant period of time, which may be problematic.

Fortunately, most insurers have not added Covid-specific exclusions or restrictions to their policies as yet.

At this stage, the only Covid-­related restrictions are around people who intend to travel to high-risk countries as determined by the Department of Foreign ­Affairs and Trade.

Setting the scene for at least the next few years, expect regular increases to life insurance premiums as the predicted Covid-related claims bite profit margins.

Life insurance companies will have no choice but to pass on the cost to consumers. We have seen this already in some countries such as India, where premiums have risen more than 20 per cent as they expect more claims due to a third wave of Covid.

If you have a life insurance policy or are considering taking one out, now more than ever is a good time to use a life insurance broker to shop around as there is a greater divergence in pricing between insurers as some are being harder hit from Covid than others.

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

Originally published as Good health at a premium: How Covid is going to affect your life insurance