17 April 2018

John Barton

Director & CEO

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Like most people, I don’t watch a great deal of free-to-air TV anymore. However, this past couple of weeks, I did watch some of the Commonwealth Games and couldn’t help but notice the number of insurance advertisements still on the air.

If those TV ads are still running – they must be working, right?

Now, it’s reasonably well known that Australia has a significant under-insurance problem. So, with the number of people buying insurance on the back of these TV advertisements, we must be addressing the under-insurance problem and surely that’s a good thing? I’m not so sure.

One of the points that these advertisements all push is that the process of getting insured is quick, simple and painless and that the policies are relatively cheap. This highlights the major difference between the policies promoted through these television advertisements encouraging the ‘direct’ purchase of cover from a life insurer online or via phone vs customised, structured life insurance policies available via a financial adviser – underwriting.

Underwriting is the process the insurer takes to assess the risk of claim for individuals applying for insurance. Traditionally, underwriting is completed at the time of application – and can sometimes involve blood tests or visits to a doctor. Whilst this process can involve some time and energy, once completed, you know you have the cover. One of the ways this process is kept relatively quick, simple and painless for direct insurance is that underwriting is often completed at the time of claim. The major problem with doing it this way is that it is too late to find out you don’t qualify or that you have an existing condition that isn’t covered.

The whole point of insurance is that it pays you when you need it.

Another common issue with direct policies is that they have relatively narrow definitions. One of the ways direct insurance companies can keep the costs low and the process simple is by narrowing the definitions to reduce the number of claims they will have to pay for in the future. Insurance companies aren’t charities – they aren’t in the business of taking on risks they don’t understand or risks that will cost them money over time. By keeping the definitions tight, they put the odds in their favour – which means your chance of being covered when it matters the most is reduced.

Furthermore, direct insurance contracts generally offer lower limits – or amounts of cover – and, consequently, have lower payouts at the time of claim.

The final and perhaps biggest difference between direct insurance contracts and the more traditional insurance contracts available is the price. The major component of the price charged for insurance is the risk premium, which is based on the insurer’s assessment of the risk. In most cases, direct insurers charge a higher premium on a like-for-like basis as a result of their limited (or non-existent) underwriting processes.

The second component of the price is administration. The cost of administration is relatively flat – it doesn’t increase directly as the amount of cover increases. The risk component, on the other hand, does increase directly with the amount of cover. Consequently, the lower the amount of cover, the higher the proportion of the premium goes to fund administration costs rather than the risk you are actually seeking to cover. In other words, more of your money is wasted on administration and less is available to cover you against the risks you are actually trying to protect yourself against.

Whilst it may be inconvenient, the fact is that you will almost always be better off by investigating the options available under a comprehensive insurance contract. By doing so, you will have peace of mind in knowing you are covered and you will have a much better chance of ending up with the cover you actually need.

If you would like to discuss your existing personal risk policies, or are considering taking out a new policy, please feel free to contact our office. Our team can walk you through the process, and help you determine what options are available to you to ensure you have the appropriate cover for your circumstances.

Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.