Making Sure Your Insurance Works For You
The media recently reported on the tragic story of a South Australian mother who is dying of cancer but recently discovered that the life insurance cover she thought was in place had lapsed when she swapped superannuation providers and didn’t realise she hadn’t activated the life insurance option at her new Super Fund.
The woman had made the swap to a bank superannuation fund through the kind of pressurised telephone sales tactics that came under significant scrutiny during the Hayne Royal Commission into the banking and financial products sectors.
We have all heard stories like this, often involving well intentioned people who have taken out or changed providers of insurance policies or purchased other financial services products, in pressured situations through dubious sales tactics, sometimes through lack of disclosure by the seller or the customer’s lack of awareness of the fine print. At the end of the day, reputable financial services providers want to see their customers well serviced by good quality products that meet their actual circumstances and needs.
Legislators and Regulators have now caught up with the type of sales practices that have resulted in the tragic outcome for the family mentioned above and banks and other financial products providers have responded through voluntary codes of practice, divesting some financial products and changing sales systems. And that’s really good outcome for customers.
The Australian Securities and Investment Commission (ASIC) recently launched consultation for its guidance on new financial product design and distribution guidelines, prepared in response to the changes in legislation that have followed the Royal Commission. They reinforce standards & considerations for companies, their boards and shareholders with respect to how they define target markets for their products, whether the products actually meet customer needs and what sales channels and techniques are used to get the products to the right consumers. In simple terms, the legislators and the regulators are focused on the sector developing financial services products which do what they say they will do, are accompanied by full and clear disclosure and are appropriately suited to the target consumers – in other words, not junk.
Situations like these raise a number of other important issues as well.
Is insurance inside your superannuation appropriate?
In the case of Life, TPD and Income Protection insurance products, the first question to be asked is whether or not the cover offered through your superannuation fund is actually right for you?
Ideally everyone with dependents would have life, TPD, income protection and trauma insurance to protect against things that can go wrong. However, this type of insurance can be considered expensive and people cannot always afford or justify the cost. Therefore, looking to the insurance products within your superannuation can seem like a good idea – they are usually automatic, without requiring a medical; and they are paid for out of your superannuation contributions.
Policies purchased within your superannuation are also usually cheaper, because the superannuation funds purchase them in bulk.
However, there are potential downsides to relying on your superannuation for this insurance.
1) Because they are purchased in bulk, they are generic and, if you have unique circumstances that apply to you, they may not cater for your needs fully.
2) These policies usually have default cover, set at quite low levels. For example, the life insurance default cover can be set at between $100,000 and $200,000 – possibly not sufficient for your circumstances.
3) Income protection policies within superannuation are more commonly opt-in and not provided as a default product (approx. only 40% of industry super funds have default income protection included). They also usually have a weekly/monthly maximum default benefit, which could be problematic if you are earning and therefore living to a higher level of income.
4) Unless you have made a Binding Nomination on your superannuation, the superannuation fund trustee may have discretion on where the money goes.
Individual circumstances are important
Individual circumstances are very important when it comes to considering income protection and related insurance coverage. For example, income protection insurance makes sense for anyone who earns a wage or salary. However, if you are self-employed or own a small business, it is just as important, perhaps even more important.
For anyone considering insurance against a serious medical condition (cancer, stroke etc.), you are unable to purchase this product through your Super Fund (due to rules within superannuation), you will need to seek that product outside Super and you should always seek out providers who have a strong track record in this specialist area.
Expert, specialist, customer-focused advice
When something goes wrong with the power at your house, you’re more likely to call a licensed electrician than consult someone in the electrics department of your local hardware store – it’s just too important to get wrong. And the same goes for insurance products. If you think you need life, TPD, income protection or trauma insurance, you owe it to yourself to talk to a specialist like Aspect UW. Getting the right advice and a tailored solution that meets your needs, as well as ongoing support and advice if circumstances change, is essential to getting the right product and getting what you pay for.