Life insurance is one of the most important investments you can make to protect your family’s future well-being. And like any investment, it needs careful consideration.
Taking out too little or too much insurance can be costly. Failing to disclose all relevant information to an insurer could result in a claim being denied – possibly after years of paying premiums – just when you need help most.
Negotiating in good faith
Heartbreaking stories about insurance companies failing to pay out when a policyholder suffers an illness or injury get plenty of media attention. What’s often glossed over in these reports is that the company is within its legal rights to deny the claim.
There are several reasons a claim can legitimately be denied: unpaid premiums; exclusion periods or clauses; or a medical condition not being severe enough to qualify for a payout. But non-disclosure is the most easily avoidable reason for claims being denied.
An insurance policy is a contract, which means both parties are required to enter into it in good faith. That means you have to respond truthfully when your insurer asks you specific questions. You also need to volunteer any information, such as pre-existing health conditions, that would be relevant in deciding whether to insure you.
The good news is that most claims are paid out in full. That noted, one of the first things an insurer will do on receiving any claim, particularly a life insurance claim that’s likely to involve a substantial pay out, is double check the policyholder didn’t misrepresent their circumstances when taking out the policy.
Non-disclosure issues are one reason it pays to choose a retail product rather than a direct life insurance policy. As the name suggests, a direct insurance policy is sold as a one-size-fits-all direct to the consumer, rather than through an adviser. It’s easy to apply for online or over the phone, with little or no medical information required.
With a retail policy, an expert adviser will walk you through the application process, taking care to ensure you don’t inadvertently fail to disclose any relevant information. It may be a little more expensive but it can save you money in the long run. An Australian Securities and Investments Commission (ASIC) report found average declined claim rates were highest for non-advised policies (12 per cent), compared to 7 per cent for retail policies.” i
There are other reasons direct insurance policies can offer false economy. These include a basic level of cover with few extra benefits and a wide-ranging clause stating ‘claims due to pre-existing conditions are not valid’.
As life changes, so should your insurance
Another issue to be aware of is that your insurance needs will vary at different life stages. So it’s sensible to get into the habit of reviewing your insurance cover annually or, at the very least, whenever major life events, such as the following, occur.
- You welcome or farewell a child
Kids are expensive, something to consider when calculating the income your partner would require should the worst happen. Alternatively, if your children have reached the age where they are independent, you may be able to scale back your policy and premiums.
- You welcome or farewell a partner
As your relationship status changes, so might your main beneficiary and the amount you wish them to receive.
- Your income or debt levels fluctuate
That payout of $80,000 a year, which seemed sufficient when you had the lifestyle of a young middle manager, might not be so livable when you’re a fifty something executive. On the other hand, once you own your home and your partner will not be left with the burden of a mortgage you may be able to reduce your cover.
The right insurance solution for you and your family will be as unique as you are. If you would like to discuss your insurance needs, don’t hesitate to give us a call.
i ASIC REP 498 ‘Life Insurance Claims: An Industry Review’, 12 October 2016