In this edition of riskinfo eMagazine, Zurich’s Andy Marshall talks to advisers about what he sees as the potential fall-out from this year’s Federal Budget, particularly in terms of the choices consumers may make, and how those choices may be influenced by their level of financial literacy…
As I write the various protagonists in the Federal Budget story are preparing to face each other at the negotiating table. But whilst there is likely to be compromise on all sides, it seems certain that the overall flavour will remain the same – everyone making a contribution and every household having their disposable income reduced, to a greater or lesser extent.
Regardless of where you sit politically, no one can argue that ripping so much ($16.5 billion by 2017 according to NATSEM) out of household disposable income will have a significant effect on every individual and every industry trying to tease that disposable income away from the house and into their cash register.
Consumer psychology at times like this is always hard to predict. Maslow’s hierarchy of needs dictates that consumers will – subconsciously at least – assign some sort of hierarchy to their consumption. For example, food, electricity and running the car (including insuring it) will be ranked as most important (and least discretionary), and clothing, holidays and other entertainment will be seen as less important and therefore more at risk of being reduced. Within the ‘essential’ categories there is always scope for saving, whether that means switching from Woolworths to Aldi, or choosing the plain teddy bear biscuits over the chocolate variety.
what we now see is all households having less money to spend on the goods and services of their choice
But where does life insurance fit into this hierarchy?
It’s a tough question to answer. Whilst there is ample evidence of the spike in life insurance sales that occurred during the GFC, my sense is that was driven by employed people – their wages unaffected – who were driven to protect what they had, spurred on by seeing a lot of their friends and family lose their jobs and their assets. There was almost a siege mentality during that time, which ultimately saw income protection sales grow at three times their normal rate.
But I’m not sure today’s circumstances are comparable. Sure, there are pockets – manufacturing and the federal public service to name a few – of job losses, but these are relatively isolated. Rather than the economy struggling per se, what we now see is all households having less money to spend on the goods and services of their choice. And let’s face it, all insurance is known to be a ‘grudge’ purchase (ie: those who buy it do so because they feel they must, not because they want to).
Whilst the Budget has been the focus, what has been overlooked by many is the impost that is already locked in, and not dependent on any negotiations: the 0.5% Medicare levy increase, intended to fund the National Disability Insurance Scheme (NDIS) and set to kick in from July 1 this year.
When you add all this up, it’s hard to escape the conclusion that many Australians will be putting their insurance holdings under the microscope, and are at risk of unfortunate decisions – driven by a combination of their need to save money and an alarmingly low level of ‘insurance literacy’.
Our own research from earlier this year highlighted just how low insurance literacy is, especially amongst those Australians whose only source of insurance is the default cover through their superannuation fund.
That research, ‘Misinformed, misinsured?’, uncovered widespread misunderstanding by consumers about what their superannuation life insurance did and didn’t cover.
It found that nearly 40% said they couldn’t survive more than a month without income, yet more than 80% of those surveyed didn’t know the waiting period on their salary continuance. (48% of 35-44 year olds incorrectly believed their waiting period to be one month or less, much shorter than the typical 3 months offered.)
Most worrying of all though – in the context of discussing the Federal Budget – is the not insignificant group of individuals who believed their super life insurance covered them for hospital, dental and even optical expenses!
The potential for making poor decisions will be heightened over the next few months as households look to balance their budgets, and I foresee many people mistakenly believing that their default cover is adequate because ‘My employer understands these things better than me’, and many also falsely believing the following products are somehow substitutes for each other:
- Life insurance
- Compulsory Third Party
- Health insurance
- NDIS
- Workers compensation
- Centrelink disability pension
So, what will happen?
For those without financial advisers, a lot of poor decisions will be made, and that means a lot of cover will be cancelled or reduced. For those with financial advisers, I think advisers themselves will be called upon to remind people what they are and aren’t covered for. In the event that cover does have to be reduced, only advisers are able to ensure that this reduction is done in the optimal way, perhaps through trimming optional features, adjusting sums insured, changing payment frequencies, or – as a last resort – taking a premium holiday.
In the event that cover does have to be reduced, only advisers are able to ensure that this reduction is done in the optimal way
Another impact of the Budget will be to significantly increase the popularity of running life cover through superannuation – as a pure cash flow play.
These are the courses of action that most Australians simply wouldn’t be aware of, and which more than ever before reinforce the value of advice and the role of advisers in increasing our embarrassingly low national insurance literacy.
Under the Spotlight provides a life company view of the issues facing the advice industry.
Andy Marshall was appointed to the position of Head of Sales Strategies and Research, Life Risk for Zurich in January 2014.
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