Insurance

Nobody wants to think about life insurance until they actually need it. But by then, of course, it’s too late. Illness and death are unpleasant topics and most of us feel pretty indestructible while we’re healthy.

On top of that, when they do think about it, many people consider life, trauma and income protection policies to be expensive, complicated and unnecessary. Family and friends will rally around and support us if things go wrong, right?

It’s also a common misconception that the government will step in and look after us if worst comes to worst. In fact, some of the most commonly held beliefs about life and risk insurance are totally wide of the mark.

But it’s too late to learn the truth once you or your family has experienced a serious illness, accident or death – so read on as we examine some of the prevalent myths about life insurance.

1. It won’t happen to me

The good news for Australians is that our death rate is one of the lowest in the world. In the three years from 2005 to 2007, the death rate was a record low of six per 1000 people, Australian Bureau of Statistics records show.

The bad news (aside from the fact that everyone does eventually shake off this mortal coil) is that three out of four people will be diagnosed with a serious illness at some time in their working lives.

The ABS reports that in September 2009, 384,000 people were permanently out of the workforce because they were unable to work. A further 113,856 were interested in work but not actively looking because of a long-term health condition or disability. A smaller, but still significant, group was out of work due to having a short-term illness or disability or because they were looking after someone else who was sick or disabled.

There are plenty of horror statistics on sickness and death: rates of cancer diagnoses, numbers involved in transport accidents and road deaths, and the prevalence of heart disease. We won’t bombard you with the gory details. Let’s just say we’re all more likely than we care to admit to suffer an illness or injury that puts us out of action at some stage in our lives, and some of us will die before our time.

If you’re an employee, sick leave might cover your pay for a period if you’re seriously incapacitated, but it won’t last forever. Most companies pay just a few weeks of sick leave and then you’re on your own, even if your position is kept open for you.

If you’re self-employed, not being able to work could mean you lose your business if you’re absent long enough.

2. Default cover in super is enough

It’s true that many people automatically gain term life and total and permanent disability insurance through their super fund. Some funds also offer income protection insurance.

Since July 1, 2008, most default super funds offered by employers have had to include a minimum level of death cover – but there are exceptions, so you shouldn’t just assume you’re covered.

And the mandated cover is limited. Such funds must offer a minimum of $50,000 for people aged 20 to 34 and just $7000 for those 50 to 55.

There’s no requirement to insure people under 19 or over 56.

While everyone’s circumstances are different, Rice Warner Actuaries estimates that life insurance cover within super is, on average, just 20 per cent of what’s really required.

Online calculators can help you work out how much cover you need. Simple ones – like the one on website iselect.com.au – magically come up with a figure after you type in your age, income and the size of your debts. Others consider your financial situation in a bit more detail.

These calculators provide a finger-in-the-wind indication, and any calculation provided by an insurance company is likely to be on the high side. For a comprehensive assessment, you need to sit down and do your own detailed budget, considering how you and your family would cope without your pay packet. Remember to consider the impact of inflation if you’re budgeting over a long period of time. A financial planner could help you with this exercise.

Insurance through super also has a number of specific shortcomings. If a death benefit payout goes to people who aren’t your tax dependants, they could face higher tax bills than if the policy were held outside super.

And children over 18 years of age may not be considered to be tax dependants.

Also, payouts go first into your super fund and then have to be released by the fund’s trustee, which is more complicated and, more often than not, takes longer than receiving a payout directly from a personal policy.

3. It costs too much

You can buy various kinds of life-risk insurance directly from insurers such as Allianz, Zurich Australia and TAL (previously Tower Australia) through the website Insuranceline.com.au. You can quickly obtain quotes on life, trauma and income protection policies online, much as you might do with car insurance.

Based on figures from Insuranceline, a 45-year-old non-smoking man in a professional occupation would pay $116.04 a month for a combined policy with Allianz that provides $500,000 of life cover, $100,000 of critical illness cover and “permanently unable to work” cover worth $500,000.

That comes to a total of $1392.48 a year - just $90 more than the online quote for a year’s comprehensive car insurance with NRMA on a 2005 Volkswagen Golf garaged in Sydney’s inner suburbs, by way of example (although you could find a cheaper policy).

A 35-year-old woman who doesn’t smoke would pay $11.54 a week, or $600 a year, for a $500,000 term life policy with Insuranceline. If she’s a professional earning $100,000, an income protection policy paying out $5000 a month for two years, after a one-month waiting period, would cost $25.06 a week - about the same as a private health insurance policy including extras.

And as is the case for private health insurance, income protection insurance premiums are tax deductible.

Life policies bought online or by phone are usually quoted on a one-size-fits-all basis. Premiums are worked out by averaging risks for the pool of policyholders, so healthy people subsidise those more likely to claim.

So if you’re fit and healthy, with no family history of disease, you could pay the same as someone who’s at greater risk of illness. But if you’re prepared to go through a more comprehensive underwriting process you should get a product that matches your circumstances better, possibly costing you less - although this isn’t always the case.

You might need to see a financial adviser to arrange this, which means you may be up for a fee for their advice - though some advisers waive such fees because they’re paid commission on life insurance products. They must disclose how much commission they receive on the products they recommend, by the way, but be aware of the potential for a recommendation to be influenced by the amount of commission involved.

In its Direct Life Insurance Products report for 2010, Rice Warner Actuaries found that insurance products bought directly are 85 per cent to 125 per cent of the price of policies sold through financial advisers - in other words, some are cheaper and some are more expensive.

Direct life products are also more expensive than cover obtained through an industry superannuation fund. For a similar, fully underwritten product, direct products are 150 per cent to 400 per cent of the price of industry super insurance products.

Insurance purchased through super is cheaper because the premiums come out of your account balance rather than your wallet.

But this has consequences for your retirement savings and there can be problems having a payout released from the fund, so make sure you read the disclosure documents and understand the rules.

As with anything else, it pays to shop around. Superannuation researcher Chant West has found dramatic variations in insurance costs between funds. For a 60-year-old, the most expensive fund charges almost 20 times the cheapest.

4. I don’t need it because my family would step in

That may be true, but have you actually asked them? And would you really want to put them in that position?

Many people expect that their parents, children or siblings would take care of them if they were injured or ill, but that can place a huge strain on everyone involved.

While they may want to help you, your family may not be financially able to meet your expenses as well as their own.

You might need a higher level of care than the family can provide. Your home might need modifications – ramps or handrails, for instance.

There’s the cost of initial treatment then rehabilitation. Some of these might be covered by private health insurance and Medicare, but there are limits and exclusions and you might need to find cash to cover additional services.

Your state workers’ compensation scheme might kick in if it’s a work-related injury, but not if the incident occurred in your private time.

5. The government will look after us

If you get sick, Medicare and private health insurance together cover many of the treatment costs. But there may still be considerable gaps. For instance, Medicare doesn’t pay for home nursing, the cost of prostheses, physiotherapy or occupational therapy, among other things.

Private health insurance might cover these items but only up to certain limits, which might be exceeded quickly if you suffer a serious injury or illness.

There are government payments that replace income while you’re sick, but the amounts they provide are quite small.

A Centrelink disability support pension, for example, is available to people unable to work for two years due to illness, injury or disability, or those who are permanently blind. The maximum payment for a single person (aged over 21, or under 21 with children) is $644.20 a fortnight – that’s just $16,750 a year.

Income and asset tests (the same ones that determine eligibility for the age pension) determine whether you qualify for payments. For example, a single homeowner with up to $178,000 in assets will receive the full payment but the pension reduces by $1.50 a fortnight for every $1000 above that amount, cutting out entirely for individuals with $645,500 worth of assets.

If you have assets but only limited income, Centrelink expects you will rearrange your affairs to provide for yourself.

Other allowances are available for people unable to work or needing assistance but these are mainly for people who already received Centrelink benefits before becoming unwell or disabled.

Similarly, a bereavement payment is available to a person whose partner has died only if both were previously receiving an income support payment.

A bereavement allowance (which is a short-term income support payment, payable for up to 14 weeks after a partner’s death) may be available depending on your circumstances, income and assets. The maximum bereavement allowance is $701.10 a fortnight, up to a total of $4907.70. As is the case for other Centrelink payments, eligibility criteria apply.

If you’re in this situation, you should contact Centrelink to find out what you’re entitled to. Centrelink has social workers who can help you after the death of someone close (phone 131 794). It also has a free and confidential financial information service.

6. It’s too hard to find a product that suits me

There are a lot of options out there and making comparisons isn’t simple. But the insurance industry is working to make things better for consumers – by making disclosure and policy documents easier to understand, for instance.

Application procedures are also being improved, with the aim of making the underwriting process more streamlined and faster. And, of course, you can apply for some policies over the phone or online.

Many comprehensive policies no longer require medical evidence or doctors’ appointments.

AMP has a launched a service called TeleDr to smooth the way in the 20 per cent or so of life insurance applications that require a medical report. The insurer’s own doctors deal directly with your doctor, rather than making you wait for practitioners to complete and return insurance forms.

If you’re in any doubt, a financial adviser can help with the process.

In addition, some insurers, like MLC, now automatically update existing policies to cover changes in medical definitions and new treatments.

7. Insurers never pay out anyway

Life insurers are bound by the Insurance Contracts Act. As long as you fulfil your duty to disclose any information that’s relevant to the insurer’s decision about whether or not to insure you, and on what terms, you should receive a payout if you subsequently have to make a claim.

The Investment and Financial Services Association surveyed life insurers whose products account for more than 90 per cent of the market and found that in 2008 nearly 35,000 claims were paid, totalling more than $2.3 billion.

That’s in the context of the Financial Ombudsman Service receiving 573 complaints about life insurers in the 2008-09 financial year. Most of these disputes related to denied claims, the time taken to assess and accept claims and the information required by insurers when dealing with a claim.

If you’re having trouble, you have the right to go to the insurer’s complaints resolution scheme; after that, the Financial Ombudsman Service can look at complaints relating to amounts of up to $280,000.