When purchasing life and disability insurance three different types of policies there are available for you to consider; group, retail, and direct. Each of these has both their advantages and disadvantages – which to the untrained eye – may not be immediately apparent.
It is important to understand what you are paying for when it comes to protection.
A direct policy is one that you purchase from the insurer without the assistance of a financial adviser. These are the types of policies you often see advertised on television or receive in the mail.
Direct policies are generally more basic than retail policies. The amount of cover that can be purchased is lower and policy documentation is shorter. Often these policies can be attained with less onerous underwriting and no medical requirements. As there is very little underwriting involved, the insurer doesn’t have the ability to assess and sort risk. This means premiums can often be higher than a policy distributed via a financial adviser.
Be wary of the fine print. Direct policies will often have more exclusions and limited terms and conditions. Terms and conditions look simpler, but this is achieved with tighter definitions and broader exclusions.
A retail policy is one which is distributed by a financial adviser and is otherwise known as an individual policy. Retail policies generally offer the most comprehensive cover available in the market along with the highest possible sums insured. Retail policies may be owned directly by the life insured (yourself), by another person, company, or trust. They can also be owned inside superannuation and include platform super funds, self-managed super funds (SMSFs), or through a separate super fund altogether.
Retail policies require a more extensive application process. This means it may take longer to put the policy in place and some medical tests may also be required.
The work required upfront when setting these types of policies up will benefit you as a policy holder in two ways. Firstly, you’re paying premiums which reflect your personal risk, rather than that of an averaged-out risk of all policy holders. Secondly, once your cover is in force, you have greater certainty of claim. This is because retail policies will generally cover all sicknesses and injuries once your health history has been assessed and the insurer agrees to your cover.
If the insurer is not willing to cover you for certain conditions, they will issue an exclusion upfront.
The one point you need to keep in mind is making sure you disclose all relevant information to the insurer on your application. This is referred to as your duty of disclosure and is governed by the Insurance Contracts Act (ICA). The insurer can have the right to alter your policy, avoid any claim, and/or cancel your policy if you haven’t told them about an issue that would have affected their decision when you applied for cover. So it is important to make sure you answer the application honestly!
Group cover is, almost always, owned inside superannuation funds. Group insurance is owned by the trustee of the super fund and will usually provide default levels of automatic cover along with optional additional cover.
The default cover may exclude pre-existing conditions or may come with no exclusions. For additional cover, you will need to apply and be underwritten. Cover is generally set on a unit basis. This means each unit of insurance is worth a certain amount of cover and the cost stays the same over time. The downside is that for every year you get older, your insurance cover reduces.
As the cover is owned inside super, coverage is restricted to what can be offered under superannuation law. Any insurance owned inside super results in claim proceeds being paid into the super fund. The trustee of the fund then needs to decide if the claim can be released to you under one of a number of conditions of release.
Terms and conditions are set by the insurer in conjunction with the policy owner, the super trustee. The terms and conditions can change at any time. If you have cover under a group scheme, you will be notified of any changes. However, you don’t have a say in whether or not you accept the changes, as they will automatically apply to you as a member of the scheme. This is one of the fundamental differences for group policies.
Another point worth noting is that the insurer of a group scheme can change. Super funds will generally tender for insurers every few years to try to get a better deal for their members.
In the past decade, group insurance has been quite volatile. Profitability has been up and down.
It is important to understand what you are paying for when it comes to protection. While a group policy was once a very cost-effective way to obtain cover, in many cases this price advantage you used to benefit from is no longer there.
KATHERINE ASHBY | SENIOR PRODUCT TECHNICAL MANAGER
BT FINANCIAL GROUP
PREPARE FOR LIFE ISSUE 23 | OCTOBER 2016
The information provided in this page is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs. You should seek independent advice from your financial adviser before making any decisions.
AUSTRALIAN MORTGAGE AND FINANCIAL ADVISERS (AMAFA)
Phone: 07 3378 2056
Fax: 07 3378 2069