The ideals of Life Insurance have been forgotten with lies, greed and malfeasance transforming what was once “the noblest enterprise” into a scheme to enrich agents and management over the customers. One bought life insurance to provide protection for your dependents. But that did not allow the policyholder to reap a benefit during their lifetime. To allow this, an endless number of ancillary products have been grafted onto the basic life Insurance policies degrading the entire industry and making the sale of “life Insurance” more attractive and therefore easier for the salesman.
Discussing the subject of life insurance raises anything from confusion to disgruntlement for those considering taking the product. Unsatisfactory experiences with Life Insurance have too frequently made the news telling of an impact that is truly heartbreaking. The impact of these life changing circumstances and misfortune that are recounted is only magnified when a resulting insurance claim is rejected. Is this the reason for the low ownership of life insurance or under-insurance in Australia?
Life insurance agents will advise of the benefits of using an agent that are particularly useful at the time of a claim. That underinsurance remains unresolved and is widely spoken about means that the consumer is not convinced of the benefits of Life Insurance and is deeply suspicions of this noble product. Is the reason for this caused by the behaviour of the Life Insurance industry, or is the lack of understanding of the need for and mechanics of life insurance the contributing factor?
Improving knowledge and understanding of the product is considered key to getting the most out of Life Insurance as a wise consumer.
Understanding Life Insurance
Life insurance is one of the products where the beneficiary of the service is not the person who makes the purchase. Thus, on a standard life insurance policy, the policy-holder is unable to realise a direct benefit during their lifetime. Ancillary products have however, been grafted onto the standard Life Insurance policy, to overcome this perceived shortcoming. This makes the sale of “Life Insurance” more attractive and therefore easier, for the salesman. The broader coverage added to life insurance, allows one to benefit during one’s lifetime, beyond the normal ideals of life insurance. This enhances the perceived benefit to the policy-holder but gives rise to other complications for the industry and leads to disputes.
In 2016, an industry-wide review of claims handling in the Australian Life Insurance Industry was carried out. This indicated that a claims decline rate of 4% for Life Insurance with higher rejection rates for Income Protection, Trauma and Disability where rejection rates were higher, on average between 7% and 16%. Insurance Industry dispute data indicates 50% of all disputes about policy definitions are for TPD and pre-existing health conditions, with the rest about specific conditions such as cancer, heart attack and stroke. Medical advancement has rendered defined life events such as heart attack, stroke and cancer out of date or not comprehensive enough to cover every scenario. The result is insurers either declining claims. Alternatively, being traumatic circumstances claims are paid on an ex-gratia or goodwill basis, and, policyholders may receive payment despite sustaining minimal or no loss or impact. The ex-gratia payments are borne by the general body of policyholders resulting in an uplift of Life Insurance costs for the general body of policy-holders.
The poor image of the insurance industry thus comes from the poor experiences of a small proportion of policyholders that has been compounded by insurance coverage being expanded beyond life insurance products providing benefits at death only.
The result is that life insurance is shunned, the preference being to assume that the basic level of insurance within superannuation provides adequately. However, the provision of a basic sum insured, not tailored to member’s individual needs, could only result in disenchantment. It’s necessary to develop a basic understanding of life insurance to ensure that one is better informed as a consumer.
Purpose of Life Insurance
In considering the acquisition of life insurance one has to be clear on its purpose. The purpose is to indemnify—it’s not an investment. One purchases life insurance to provide protection for one’s children or other dependents. The purpose is to protect the weak or dependent against misfortune by distributing the burden of the loss of one among many. As one is protecting for loss, then on that basis, there can be no money made and nothing created through life insurance.
Although the calculations in Life Insurance, undertaken by actuaries, are intricate these are founded on the basic principles of the law of average. All human events, such as births, deaths and casualties are found to occur with a certain average based on a large number of observations and over a long period of time. Thus, if we take a large number of people of the same age it is uncertain which one of them will die in any one year but it’s absolutely certain as to how many will die on average over the years until they are all gone.
The problem in life insurance has always been this: having a large body of people at a given age what annual premium must be charged to ensure that all the death losses in aggregate for many years can be paid out. The solution is dependent on three separate elements of cost of the insurance; the outgoings or claims paid out for the yearly deaths, the interest earned and the expenses of management. Averages are used with the younger people paying too much and the older too little. This is on the grounds that the older will have been paying longer for the cost of their risk contributing to the build-up of reserves for use in later years when the premium is unable to cover the cost.
Today however, the death feature of a policy or financial plan is only mentioned incidentally along with the words ‘investment’, total and permanent disability and trauma insurance features that are promoted as they are more salable and appealing. These variations rely on the theme ‘that it is to invest rather than insure’ and the insured may thus reap a reward from ‘Life Insurance’ during his lifetime as it is more likely that one of these risks will arise during one’s lifetime. In this way what was a principled enterprise has been degraded into a scheme that entices one to enrich themselves, and along the way allow agents and management to enrich themselves over the beneficiaries.
The conclusion is not to shun life insurance but keep its purpose in mind—being to provide protection for one’s children or other dependents.
- make a realistic assessment of insurance needs and,
- while circumstances of age and health permit, consider buying appropriate cover.
What insurance needs are appropriate? Here there are two important questions to ask; what financial needs will your survivors have after your death and what financial resources will be available to them.
Superannuation is made up of:
- the accumulated contributions made into the fund over a person’s working life, and probably
- the value of life insurance in the event of premature death
The question you need to ask yourself is:
- How can I make sure that my superannuation balance will be enough for me to live on for the rest of my life?
- How do I work out how much insurance I need?
These questions are of vital importance to everyone. Very few people consider them and solve them satisfactorily.
If you are an employee, your superannuation contributions and therefore the ultimate accumulated balance is determined by how much you have earned over your lifetime. This does not reflect what you need for your retirement. Furthermore, in Australia the conversion of the accumulated superannuation lump sum into an income stream is not mandatory.
When it comes to the life insurance component, most people have no idea how much insurance is necessary to support their dependents. As the superannuation industry generally provides everyone with a nominal amount of cover without any careful and original thought to determine an appropriate level of insurance many are left with the false comfort that their insurance needs have been properly considered.
forethawte.com.au aims to offer some ideas for you to consider the superannuation lump sum required and a life insurance amount appropriate for you.
In planning your financial future the risks that you have, particularly with the potential for long-life, is that you superannuation balance will not support your desired income for your remaining life.
Secure income streams that guarantee the fulfillment of the planner’s desire for the provision of living expenses and ongoing support for the family are also not without risk.
An income from superannuation lump sum
The following simple story aims to explain the difference between a superannuation lump sum payout or a lump sum payout from life insurance policy and a regular income.
Suppose you went to a building contractor and said, “I want you to build me a house.” “What kind of a house?” “Well,” you say, “a Colonial, brick house, with ten rooms, three baths, and a sun porch, slate roof, hardwood trim and floors, open plumbing, and hot-water heat.”
Sometime later he calls you on the telephone and says, “I’ll drive you out to look at your new house.” You motor out to a beautiful section of the city and stop in the midst of a group of handsome homes.
The contractor says: “Here’s your house, just what you ordered.” But you are puzzled. There isn’t any house opposite the place where you have parked the car. “Where is my house?” you ask. “Right here,” he answers, pointing at the block before which you have stopped. “But there isn’t any house there,” you exclaim, in amazement. “There is nothing on that lot but a heap of bricks, barrels of lime, lumber, kegs of nails, building hardware, slate shingles, plumbing supplies, and cans of paint.”
“Well, I call that a house,” says the builder. “A house!” you exclaim. “Why, that is only the material out of which a house may be built.” A superannuation lump sum is only the brick and mortar of the House of Protection. And yet every day, all up and down this country, superannuation and related life-insurance policies, intended to furnish permanent support are settled in lump sum and people are saying to themselves with satisfaction, ”I have provided my family protection in event of my premature death.”
Adapted from: Lovelace, Griffin M., 1876-. The house of protection, 1921. New York and London, Harper & brothers.
Conversion of superannuation lump sum
The conversion of accumulated superannuation into an income stream is not mandatory. However the benefits of converting superannuation or a life insurance settlement into an income stream are enormous.
Most people believe that their superannuation or life insurance will provide for them into retirement or their dependents in the event of their premature death. The accumulated balance in superannuation represents a portion of a person’s average lifetime earnings and most people don’t plan how much this will amount to. Alternatively, how life insurance will support their dependents. Superannuation contributions are made at a mandated level and some people may have a basic level of life insurance. In order for these two things to provide for retirement or dependents, it’s important that they are invested to provide an income stream.
In these circumstances, dependents need to be protected. But how are they protected and indeed what is ”protection”? According to the dictionary, protection is that ‘which preserves or keeps from injury or harm’. What is the danger or harm from which superannuation and life insurance is intended to shield dependents? It is the lack of food, shelter, clothing, medical care, education, and reasonable comforts, either for life or for a specified period.
Does superannuation and life insurance, as it is arranged in the average case, really protect the beneficiaries against the lack of the necessaries and reasonable comforts of life? Unfortunately, there is no doubt as to the answer to this question. It is emphatically ”no.” The average person is not actually guaranteeing protection to the family, as thought.