Insurance

We suggest some questions that will make sure you form a fruitful relationship with your chosen insurance provider.

Your relationship with your life insurer is unlikely to be close but it will be long term. Premiums will cost you a considerable amount over the life of the policy and if you need to claim, you’ll expect top-quality service and support. Before taking out a policy, check the provider’s credentials. These questions will get you started.

1. Who backs you and what is your financial strength?

It’s not always obvious who is behind an insurance policy. Gerard Kerr, the head of product and marketing for life insurance for financial services provider ING Australia, says some companies “white label” other companies’ insurance products (that is, they sell them under their own brand) so it’s unclear who is taking on the risk.

The bottom line issue is this: will the company insuring you be around if you need to make a claim 20 years from now?

2. How volatile are your premium rates?

Expect premiums to rise over the policy’s term due to factors such as inflation. But if there are wild swings in the cost, that could indicate a problem with the sustainability of the company’s practices.

“They might introduce a liberal benefit that wins them market share,” says Sean McCormick, the general manager of advice product for MLC Insurance. “But then they might find that when people claim they have to put up the premiums.”

3. How often do you upgrade or close off your policies?

Life insurance products are being improved all the time but some companies only extend upgrades to new customers.

Insurers may close off policy series rather than raise premiums for products that are giving them grief when more people are claiming than they expected. Raising premiums would encourage customers to start cancelling policies. Enhancements won’t be passed onto old products. So you could be stuck in an out-of-date policy that doesn’t cover you as well as other products might.

4. Do your products contain a claims reduction clause?

These are well known in the life insurance industry but you certainly don’t want one in your policy. Claims reduction clauses are usually tucked away in the fine print. They introduce a grey area into the insurance contract that may allow an insurer to avoid paying your claim or reduce your benefit if they believe you can do – or earn – more than you say you can.

5. How often and how much does the company pay in claims?

While all insurers will try to dazzle you with their statistics if you ask them this question, big numbers can give you an idea of the scale of the company you’re dealing with. Measures like “the proportion of claims paid compared with those made” give clues about how likely you are to be paid if you need to make a claim. Don’t expect 100 per cent payout rates.

6. What kind of clients do you target?

It will be comforting to know that the company has paid claims made by policyholders who are broadly similar to you in age, health and profession. Some insurers specialise in covering people who work in particular industries and hazardous roles – such as miners, police officers and security guards – who might otherwise find it difficult or expensive to get insurance.

7. Are there packaging opportunities?

You may get a discount for taking out two or more policies. This could apply to an individual taking out several kinds of cover with the same insurer, or to family members or business partners with related policies.

8. What additional services are available with the life insurance policies?

Simply put: what can I get without first having to die or get sick? Aside from the basic policy terms and conditions, life insurers are starting to offer services designed to keep you fit and healthy (to reduce the risk you’ll make a claim). These sweeteners should not be the main reason for picking a policy but, if it’s a close race between two providers, they might just tip you one way or the other.

9. How flexible are your products?

So that you don’t have to start all over again at some time in the future, find out whether your policy will let you increase your cover later on if you take out a mortgage or get married and have kids. Also check if there are alternatives to letting the policy lapse if you find yourself struggling to pay premiums. You might be able to extend the waiting period on an income-protection policy, for example.

It’s also useful to have a choice of stepped premiums (which rise as you get older) or level premiums (that are not linked to your age). A level premium on a long-term policy like income protection insurance can save you tens of thousands of dollars. Stepped premiums may be cheaper for shorter term policies.