{"id":101,"date":"2014-06-16T17:22:27","date_gmt":"2014-06-16T07:22:27","guid":{"rendered":"http:\/\/magazine.riskinfo.com.au\/15\/?p=101"},"modified":"2014-06-20T08:03:35","modified_gmt":"2014-06-19T22:03:35","slug":"under-the-spotlight","status":"publish","type":"post","link":"http:\/\/magazine.riskinfo.com.au\/15\/under-the-spotlight\/","title":{"rendered":"Federal Budget and low insurance literacy will drive poor consumer decisions"},"content":{"rendered":"
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In this edition of riskinfo eMagazine, Zurich\u2019s Andy Marshall talks to advisers about what he sees as the potential fall-out from this year\u2019s Federal Budget, particularly in terms of the choices consumers may make, and how those choices may be influenced by their level of financial literacy\u2026<\/h3>\r\n<\/div>\n

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 \u2013 everyone making a contribution and every household having their disposable income reduced, to a greater or lesser extent.<\/p>\n

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.<\/p>\n

Consumer psychology at times like this is always hard to predict. Maslow\u2019s hierarchy of needs dictates that consumers will \u2013 subconsciously at least \u2013 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 \u2018essential\u2019 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.<\/p>\n

what we now see is all households having less money to spend on the goods and services of their choice<\/p><\/blockquote>\n

But where does life insurance fit into this hierarchy?<\/p>\n

It\u2019s 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 \u2013 their wages unaffected \u2013 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.<\/p>\n

But I\u2019m not sure today\u2019s circumstances are comparable. Sure, there are pockets \u2013 manufacturing and the federal public service to name a few \u2013 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\u2019s face it, all insurance is known to be a \u2018grudge\u2019 purchase (ie: those who buy it do so because they feel they must, not because they want to).<\/p>\n

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.<\/p>\n

When you add all this up, it\u2019s hard to escape the conclusion that many Australians will be putting their insurance holdings under the microscope, and are at risk of unfortunate decisions \u2013 driven by a combination of their need to save money and an alarmingly low level of \u2018insurance literacy\u2019.<\/p>\n

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.<\/p>\n

That research, \u2018Misinformed, misinsured?\u2019, uncovered widespread misunderstanding by consumers about what their superannuation life insurance did and didn\u2019t cover.<\/p>\n

It found that nearly 40% said they couldn\u2019t survive more than a month without income, yet more than 80% of those surveyed didn\u2019t 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.)<\/p>\n

Most worrying of all though \u2013 in the context of discussing the Federal Budget \u2013 is the not insignificant group of individuals who believed their super life insurance covered them for hospital, dental and even optical expenses!<\/p>\n

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 \u2018My employer understands these things better than me\u2019, and many also falsely believing the following products are somehow substitutes for each other:<\/p>\n