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Life insurance – the real story of why it matters

Life cover has something of an image problem right now. But before dismissing it altogether, take a moment to weigh up the facts to understand why it remains a cornerstone of financial security.

Life cover has something of an image problem right now. But before dismissing it altogether, take a moment to weigh up the facts to understand why it remains a cornerstone of financial security.

Let's start by addressing the elephant in the room. In 2016, news headlines were dominated by allegations that the Commonwealth Bank's life insurance arm – CommInsure, with its massive customer base of four million Australians, had denied heart attack claims based on outdated policy definitions.

Understandably, some people questioned the value of having life insurance.
But, before you toss in the towel on life cover, we'll take a close look at it why it remains so important.

Only 4% of life cover claims are knocked back

In the wake of allegations about CommInsure, our money regulator ASIC undertook a review of the way the life insurance industry handles claims.

ASIC found that across the full suite of life insurance products including income protection, TPD and trauma cover, “90% of claims are paid in the first instance”1. When it came solely to life insurance only 4% of claims were declined2.

As a measure of strength of the broader industry, around $8.2 billion was paid out in life insurance policies in the year ending 30 June 20163, and following ASIC's review, the Financial Services Council introduced a Code of Practice that holds life insurers to high standards of claims handling4.

Life cover offers support in times of stress

Interestingly, ASIC Deputy Chairman Peter Kell says, 'Life insurance is a vitally important financial product that helps support consumers and their families at times of significant stress”5.

That's certainly true, and like many workers, you may have life insurance in place through your super. But if you're relying solely on this to take care of your family in the event that you're no longer around, you could be setting your loved ones up for financial hardship.

Cover of 10 x annual income is the benchmark

A report by Rice Warner found the average 40-something couple needs life cover equal to ten times their annual income just to pay off household debt and maintain the family's current living standard6.

Yet, according to research group Canstar, the life cover you hold through super is likely to worth $100,000, possibly $200,0007.

Clearly, many families are facing a major shortfall in life insurance, and it's something that could completely change your loved ones' lives if you're no longer around – and not always for the better.

Top up cover through super?

Of course, the option is always there to increase the level of life cover you have through your super fund. The downside of this approach is that the premiums will come out of your nest egg, leaving you with less money for retirement.

But there's a potentially more serious downside to consider.

There is no guarantee you will be able to nominate who you'd like to receive the payout. Your super fund can have discretion about who your life insurance monies go to, and even if you complete a binding death nomination, you can face limitations in who you can nominate as a beneficiary.

The bottom line

Life cover remains an important product to protect your family's wealth and financial wellbeing. But do check how much protection you have in place through your super. It's not worth assuming it will be enough.

A sensible strategy is to set a date to talk with me about your level of life protection.

Interestingly, the ASIC review found that consumers who purchased life insurance with the help of a professional adviser faced lower rates of claims denial than those who purchased policies direct from the insurer”. This reinforces the importance of speaking with your local Mortgage Choice financial adviser to ensure your life cover is right for your needs and that you fully understand the nature of the product you're buying into.

6Proper adequacy in life insurance means looking beyond rising premiums' – Rice Warner media release, December 2013


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Posted in: Financial planning

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