Underinsurance misery

The real cause of the underinsurance misery

The inherent flaws of direct and group insurance will exacerbate the problem of underinsurance and leave many Australian clients without appropriate levels of cover.

Mark Schroeder – Chief Executive of Spectrum Wealth Advisers

Have you ever been in a room, heavy with grief, with the family members of a suddenly-deceased or disabled loved one, trying to explain why their direct or group insurers are refusing to pay up?

Too many times in my career I have been asked to help a family tackle direct/group insurers who have denied or avoided insurance claims. Imagine the family’s surprise when I tell them that in most cases they would have had more options, more cover, more benefits, paid less or had higher super balances, with a better than 90 percent chance of getting their claims paid and received qualified financial advice, had they obtained their insurance through a financial adviser.

This is called the ‘underinsurance problem’. We are talking about life insurance (life, trauma, TPD and income protection). It has been estimated that 70 percent of eligible Australians are either uninsured or underinsured. One of the saddest parts of this chronic underinsurance issue is that many people who think they have adequate cover aren’t even aware that they are actually relying on dangerously low levels of cover on average in super to protect them or their families if they suffer an insurable event.

These low levels of insurance cover are not only drastically insufficient, they can easily cost 25 to 45 percent more than retail insurance that has higher levels of cover. Moreover, the high cost of group insurance in super, in many cases, erodes people’s super balances. Sometimes, the super balances are withered down to zero due to ridiculously high premiums that have increased over time with age, for very little cover, leaving people with nothing to retire on, yet insurers attain bloated profits. The situation is completely unacceptable and should not be allowed to continue.

Worse still, the low levels of cover, usually around $250,000-$300,000, are not even enough to clear the average mortgage, let alone support a family faced with years without a primary breadwinner. A million dollars of life insurance cover is probably about that average minimum requirement nowadays. For a person under 40 who is a non-smoker, $1 million worth of life cover can cost around $80 per month, whereas in super it can be higher than $150 per month. Group policies in super, like direct policies, are only underwritten at the time of claim and generally have low levels of cover. The client doesn’t own the policy (which can mean the super trustees can decide whether a claim is to be paid), beneficiaries can be taxed significantly on any claim payout and there is a less likelihood of a claim being paid when compared to retail insurance. If all this wasn’t bad enough, many group insurances have ‘profit share’ arrangements, meaning that the super fund managers receive an extra bonus payment from the insurers if the number of claims paid is reduced compared to a forecast.

Direct or group insurance policies that are underwritten only at the time of claim leave the consumer vulnerable to having their claims denied or their policies avoided. This shouldn’t be allowed. Direct and group insurance need to measure up to community expectations by ensuring all underwriting is undertaken at the commencement of a policy agreement. One industry organisation’s CEO recently said, “Underwriting after a death or illness occurs is unconscionable.” The CEO continued, “Imagine the grief of a spouse who discovers that after paying life insurance premiums for months or years, a claim will not pay out on the death of their spouse – and never would have been paid out.” Underwriting needs to happen at the time of policy application, not at the time of claim.

Senator John Williams, speaking at the recent parliamentary inquiry into the behaviour of insurance companies, said, “With direct insurance, you may go off to bed at night thinking, ‘I’ve done the insurance policy. I’ve paid the premium. I’m safe. If I get bumped off or I get crippled, the wife and the kids are safe.’ The next thing is that they go back to the underwriting at the claiming time and you have not got a thing.”

You can see why many people mistakenly rely on their insurance policies in super to bail them out if things go wrong. Australians are highly underinsured when compared to other developed nations, even some of the less wealthy countries in Europe. A survey of Australian families found that a massive 95 percent of families don’t have adequate insurance. One in five families will be impacted by the death of a parent, serious accident or illness that leaves them unable to work. The typical family will lose 50 percent or more of their income after a serious illness, injury or loss of a parent due to underinsurance.

I am often shocked by the hypocrisy of certain superannuation-fund organisation members who rail against financial planners over insurance, when what is happening in group insurance is bordering on the unethical.

The facts are that obtaining insurance through a financial adviser has the best chance of meeting the client’s needs. Having the appropriate lever of cover, the policy on average will cost less, is underwritten at the time of application, the consumer will own the policy, there is the highest possibility of having a claim paid and the beneficiaries won’t ordinarily pay tax on their benefit payment, and your financial adviser will use his experience and expertise to fight for his client if there are any issues with the insurance company at claim time. Just in the same way that I have had to fight for clients that weren’t even mine, who relied solely on their insurance in super with no financial advice. Courtesy: Risk Adviser – News and intelligence for insurance advice specialists Publication, 15 March 2017.

Dreamhouse Investments is an Authorised Representative of Spectrum Wealth Advisers.

Refinancing, Should I Do It?

Exit costs when refinancing

Refinancing can be a great way to save money if you believe you are paying too much for your loan, but there is more to it than just finding a loan with a lower interest rate and making the change. Before making the switch, ensure the savings you could make outweigh the fees involved. Here are the different exit costs to consider:

Exit fee
Although loans that were taken out after 1 July 2011 are not subject to a deferred establishment, or exit, fees, those taken out prior may still be. Also, known as ‘early termination’ or ‘early discharge’ fees, they can sometimes be paid by your new lender but are normally applied to an early contract exit.

Establishment fee
Also, known as ‘application’, ‘up-front’ or ‘set-up’ fees, these cover the lender’s cost of preparing the necessary documents for your new home loan. They are payable on most new loans, and the alternative to not paying this particular fee is being charged higher ongoing fees for the life of the loan.

Mortgage discharge fee
Covering your early legal release from all mortgage obligations, this fee is not to be confused with an exit fee. Also known as a ‘settlement’ or ‘termination’ fee, its purpose is to compensate your lender for the revenue it may lose due to the contract break.

Lender’s mortgage insurance (LMI)
The non-transferrable premium means that if you hold less than 20 percent equity at the time of your refinance, you may have to pay LMI even if you paid it on the original loan. Extra care is also needed here because, whether or not you hold 20 per cent of the original valuation of the property, you may not if the property’s value has decreased and; while LMI may not have been a consideration at all in the original loan, it may be payable on the refinance.

Stamp duty
If your purpose for making the switch is to increase your loan amount, for example, to fund renovations, then stamp duty will apply only to the difference between the original loan amount and the refinanced loan amount. Different rules apply in different states, so it’s worth speaking to your broker to see if this charge applies.

Other government charges
Fees are applied for the registration and deregistration of a mortgage so that all claims on a property can be checked by any future buyers. Varying from state to state, these can potentially add up to $1000 or more.

Break fee
If you were on a fixed rate loan, your lender is likely to charge you a fee for ‘breaking’ out of the loan term. This fee varies depending on the amount owed, the interest rate you were locked into, the current interest rate and the duration of your loan.

Although some of these fees can be negotiated by a broker, the total cost can be substantial. An MFAA accredited finance broker can ensure that refinancing will help you achieve your goals while maintaining your capacity to service the debt. A finance broker can also ensure you are only paying the relevant fees for your unique circumstance.

Income Protection Insurance

Insurance for something you can’t see or touch, such as your income, may seem strange. But how would you pay your mortgage if you were unable to work?

When considering insurance, it’s common for people to pass it off as a pesky added fee involved in owning a car, running a business or protecting a house against damage. Income insurance, on first glance, can seem like another costly precaution that’s unlikely to prove useful.
But when you think about how your income facilitates your lifestyle, it’s often at the top of the list in regards to things that you can’t afford to lose. Cars and houses can be replaced, but losing an income, perhaps for life, could see both lost.
Income protection insurance covers salary loss due to injury or sickness. Unlike workers compensation, it applies to injury or sickness at any place or time. And, unlike government allowances, it pays in accordance to your earning capacity.
If someone is injured under worker’s compensation, for the first few weeks they receive a higher rate, but then it drops. Therefore, people’s standard way of living is sacrificed if they depend on this form of protection.
Income protection policies vary in regards to their terms and conditions, but they usually offer 75 per cent of gross wages for a maximum time period. It’s a form of insurance that is particularly important for people who have regular repayments to make against debts.
The most important reason for income protection is when a person has a strong reliance on an income.
When you have someone with financial responsibilities, like a family or a mortgage, that’s an important time for income protection.
Having a majority of your current income insured against the possibility of being away from work helps you avoid defaulting on mortgage payments, personal loans or credit cards.
It can be the difference between continuing along within your current lifestyle following illness or accident, or being forced to dramatically change your lifestyle due to an inability to repay your debts.
Most people these days have enough stress already, with the economy and the price of housing going up. Income protection gives that little bit of extra peace of mind. It works when you can’t work.
Considering how you will pay your mortgage if you were away from work for a period is essential, and an MFAA Accredited Finance Broker can work with you to help you find the right insurance to help ensure your investment in property is protected.