Dying to know: Is life insurance worth the premiums?
Did you know that if you have superannuation, it most likely includes life insurance?
In 2018, a federal parliamentary report found almost 64 percent of active life insurance policies were held through superannuation.
But when the Federal Government changed who is entitled to the default insurance, that number took a hit — KMPG estimates it dropped to 51 percent.
Are you one of the people no longer automatically insured through your superannuation? If so, you might be wondering whether or not to take out separate life insurance, especially given the events of the past few years.
Life insurance can give you and your family peace of mind. Especially knowing that they will be taken care of financially if something happens to you. But with so much controversy over payouts, is life insurance worth it?
Changes to life insurance in superannuation
In 2020, the Federal Government introduced changes to how life insurance is offered with superannuation.
The government argued the modified rules would safeguard retirement funds from the cost of insurance that you may not need. Especially if you’re only 25 and you’re getting slugged about $160 a year for something you never requested (a figure that rises considerably as you age).
Under the new rules:
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- You will no longer automatically have life insurance if your account is inactive for 16 months
- Life insurance will not be provided if your balance is below $6000
- If you're under 25, you won't automatically have life insurance in your super unless you tell your fund that you want it
The last two won't apply if you work in a dangerous job and your fund chooses to give you automatic cover. Or if your employer pays for your insurance.
What is life insurance?
Life insurance is a contract between you and an insurance company. You pay premiums (an amount of money paid regularly) to the insurer, and they agree to pay a lump sum benefit to your nominated beneficiaries if you die or are diagnosed with a terminal illness.
Most people take it out when they have young children or a mortgage. As it gives them peace of mind that their loved ones will be looked after financially if something happens to them.
You can also take out income protection insurance. This is worth considering if you are self-employed or your income is the main source of financial support for your family.
Types of life insurance
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- Life cover - pays a lump sum benefit if you die
- Total and permanent disability (TPD) cover - pays a lump sum benefit if you become totally or permanently disabled and are unable to work again
- Trauma cover - pays a lump sum benefit if you are diagnosed with a specified trauma condition, such as cancer, or you have a heart attack
- Income protection cover - pays a benefit if you are unable to work due to sickness or injury
What life insurance is not
Life insurance is not an investment, although some policies have features that let you invest your premiums.
It is also not funeral insurance. While life insurance can help pay for funeral costs, it is not designed for this purpose. The typical payout for funeral insurance is usually $15,000 maximum, while life insurance can reach millions depending on your policy.
How does life insurance work?
When you take out life insurance, you need to decide how much cover you want and for how long. This will determine the premium you pay.
But, first, check whether your superannuation automatically provides you with insurance. And, if so, how much? You may be able to increase or decrease the amount according to your circumstances.
If you do determine you need separate life insurance, there are many different companies to choose from, such as TAL, AIA and Allianz.
No matter the insurer you choose, you will be asked questions about your health and lifestyle (eg: if you smoke or have pre-existing medical conditions). This will affect the likelihood of you making a claim, and how big a risk the company determines you’ll be to insure.
You need to decide who you want to benefit from your insurance policy (your beneficiaries), as they will receive the payout if you die.
Remember to keep your life insurance up-to-date, as your needs may change over time. For example, you may need more cover if you have a family or take out a mortgage.
Where to buy life insurance
You can buy it through an insurance agent or broker, an insurance company or insurance aggregators. Each option has its pros and cons, so it's important to compare them before making a decision.
Payment options
The most common way to pay for life insurance is through your superannuation. This is because the premiums are generally lower than if you were to take out a policy outside of super.
Another way is to pay for it directly from your bank account. This is a good option if you have a steady income and are comfortable with the monthly payments.
Other products such as home loans can also offer life insurance, but it's important to compare with other policies, as the cover can be limited compared with standalone life insurance.
How long do I pay for it?
The length of time you pay for life insurance in Australia depends on the type of policy you have.
For example, if you have a term life insurance policy, then you will pay premiums for a fixed period of time, say 10, 20, or 30 years, or until you reach a certain age. At the end of that period, your policy will expire and you will no longer be covered. Some insurers such as Real Insurance can extend your cover if you outlive your policy. They may also give you back a small percentage of the premiums you paid.
Benefits of life insurance
The main benefit of life insurance is that it can give you and your family peace of mind, knowing that they will be taken care of financially if something happens to you.
A payout can also help cover debts such as a mortgage or personal loan, as well as everyday living expenses.
It can also provide financial security for your family in the event that you are unable to work due to illness or injury.
Drawbacks of life insurance
It can be expensive, particularly if you are considered high risk.
Another downside is that payouts can be slow to process, which can be frustrating if you or your family need the money urgently.
Finally, life insurance does not cover everything and there are exclusions that you need to be aware of before taking out a policy. For example, most policies will not pay out if you die as a result of suicide or if anything happens to you within the first 12 months of the policy.
Is there a best age to take out life insurance?
It depends on your individual circumstances. However, as a general guide, you may want to consider taking out life insurance when you have young dependants. Or if you have a mortgage or other debts that would need to be paid off if you died. A life insurance calculator can help you work out how much that might cost you.
You may also want to consider taking it out if you are self-employed or your income is the main source of financial support for your family.
Finally, keep in mind that, just like health insurance, life insurance premiums generally increase as you age, so compare policies and costs before making a decision.
How else can I cover my costs if I don't have life insurance?
One alternative to life insurance is self-funding. This entails creating a savings account for your loved ones to draw from after you're gone. However, there's always the temptation to dip into it.
Another alternative is annuities. Annuities are a type of insurance that pays out a regular income, usually for the rest of your life. This can be a good option if you're retired or close to retirement. And if you want to ensure you have a regular income stream.
How to make a claim on a life insurance policy
The process can vary depending on the insurer. Generally, your beneficiary will need to provide proof of death (such as a death certificate). Or you will need to provide medical certificates if you are permanently disabled, as well as evidence of the policy (the policy document or email confirmation from the insurer).
Your nominated beneficiary will also need to complete a claim form, which can be obtained from the insurer's website.
Once the insurer has received all the required documentation, they will assess the claim and decide whether or not to pay out.
If the claim is successful, the payout will be paid to you or your beneficiaries (for example, your partner, children or other nominated parties).
What if I need the money urgently?
You may be able to access some of the life insurance payout early through what is known as an 'advance payment'.
Advance payment is a portion of the payout that is paid out before the full amount is processed.
To be eligible for an advance payment, you will usually need to provide evidence of financial hardship (for example, a letter from your employer or bank) or a death certificate if claiming life cover. If your claim is successful, the insurer will process the advance payment within a few days.
However, keep in mind that you will still need to wait for the full life insurance payout to be processed before you, or your beneficiaries, can access the rest of the money. And not all life insurers offer this feature.
What if I can’t afford the insurance premiums?
If you're having financial difficulties, there are a few things you can do.
First, you could try switching to a cheaper policy. There are a number of comparison websites that can help you find the cheapest life insurance policies on the market.
You could also consider increasing your excess. Which is the amount of money you have to pay towards a claim. Increasing your excess will usually lower your premiums. But it means you will have to pay more if you need to make a claim.
You can also cancel within the cooling-off period. Which is usually 14 days and get a full refund, no questions asked. So if you're not happy with your policy, you can always cancel it and switch to a different one. Cancelling a policy is usually pretty simple. You just need to write to your insurer and let them know you want to cancel.
You will usually need to pay any outstanding premiums. But you won't be able to get a refund on any money you have already paid. Unless you cancel within the cooling-off period.
Major controversies in the life insurance industry
No refunds if you cancel your policy
Life insurance is a contract. And once you enter into that contract there are certain obligations that you have to fulfil. Unless you cancel within the cooling-off period.
For example, if you have a life insurance policy with a 20-year term, you are obligated to pay the premiums for those 20 years. If you cancel the policy before the end of the term, you will not get any money. Additionally, if you have borrowed against your policy, you will still be required to repay that loan even if you cancel the policy.
As you age, the cost of premiums generally increases
Another drawback of life insurance is the increasing premium as you age. Premiums are generally lower when you're younger and increase as you get older. This is because the older you are, the greater the chance of making a claim.
Improper assessment of claims
In some cases, life insurance companies may have been improperly assessing claims and delaying or denying payouts.
Just a month ago, the Life Code Compliance Committee (LCCC) reported that 45 percent of claims decisions were reversed after consumer complaints, which were mainly about the failure of insurers to notify their clients about changes in their cover, resulting in rejected claims.
Poor systems and controls
In November 2021, the Australian Securities and Investments Commission (ASIC) initiated legal action against Australia Bank-owned life insurance firm MLC Life for allegedly collecting insurance premiums from around 260,000 customers but not providing any benefits.
The bulk of the unpaid claims, which totalled $17.5 million, relate to:
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- Refunds to customers who had cancelled loan insurance or paid out loans
- Failure to notify 800 customers their premiums had increased or were overdue
- Inappropriate compensation to 297 customers undergoing rehabilitation following an insured injury or disability
- Denied payments because the insurer had failed to update its definition of ‘severe rheumatoid arthritis’
Mental health discrimination
Also in November 2021, Public Interest Advocacy Centre (PIAC) called for ASIC to look into life insurers after alleged bias against clients who had mild mental health problems and sought treatment.
According to the PIAC report, life insurance companies refused to pay out on policies or denied claims on the basis that individuals had failed to disclose their mental health issues.
Misleading information
ASIC has secured compensation for OneLife and Freedom Insurance customers after the companies were found to have misled consumers.
ASIC’s investigation found that OneLife and Freedom Insurance had used high-pressure sales tactics. They also made false or misleading representations to consumers about the value of their policies.
Some customers were not told the key features and limitations of life insurance policies at the time of sale. Others were misled about how much cover they would receive. And were signed up for the policies they didn't really want.
If you have issues with your insurer...
Life insurance is meant to give you some peace of mind. So don’t be afraid to speak up if you feel that you aren’t getting what you signed up for.
If you think your claim has been unfairly denied, or if you're having trouble getting your insurer to pay out, don't worry. Regulations are in place to protect you.
First, you can make a complaint to the insurer directly. If you're not satisfied with their response, you can lodge a complaint with the Australian Financial Complaints Authority (AFCA).
You can also contact ASIC if you think your insurer has misled you or engaged in unfair conduct.
If you're stumped as to where to turn, let us know and we'll take care of it for you.
