Life Insurance – The Importance of Advice

Adelaide adviser, Mark Thompson, sounds a warning to his peers about some of the issues that may arise for consumers when their selection of life insurance products is delivered via general, rather than personal advice…

Recent bad publicity linked to the advice of some bank advisers doesn’t mean that going it alone is a better option when it comes to the selection of Life Insurance. Most consumers are unaware that there are ‘parallel worlds’ when it comes to the purchase of life insurance policies. Products provided under General Advice do not require the provider to offer advice. A suggestion to read the Product Disclosure Statement is about all the advice there is. Most insurance policies that are purchased from your local supermarket, online or promoted via the post meet the description of General Advice. The purchase of an insurance policy under these circumstances may not, however, be in the best interest of the consumer. By contrast, insurance products that are accompanied by Personal Advice require the adviser to ‘Act in the best interest of the client’, which means matching insurance policies and strategies with the client’s needs.

We should insure because we are going to live, not because we are going to suddenly die

Yes, purchasing a life insurance policy online may be quick and easy, but consider these issues:

  • Is the sum insured sufficient to cover debt, lost income for a spouse and children as well as their education?
  • If the policy is self-owned, is there a will that will distribute the death benefit as the consumer intends?
  • If the estate is to be bypassed because of acrimonious relatives, have the appropriate beneficiaries been nominated in the insurance policy?
  • Why consider an additional policy when maybe just increasing death benefits in the client’s own superannuation plan may be the best way to proceed because it’s more cost and tax effective?

What about more likely insurance events like Cancer or Heart Attack?

The sudden death of a spouse or life partner is the least likely life insurance event for most couples. For a 45 year old male/female couple it is 15 times more likely that one will be diagnosed with a life threatening illness and survive for at least 12 months than one of them suddenly dying. This is why Dr Marius Barnard, part of the heart-transplant pioneering team with his brother Christian, suggested that ‘We should insure because we are going to live, not because we are going to suddenly die’.

Consumers can also purchase critical illness or trauma insurance online without any advice, but is that the best way to proceed? Most consumers who buy online might assume that all definitions for dread diseases are about the same, and that it’s only the price that differs.

Let’s look at the definition of heart attack that is included in one online Product Disclosure Statement:

Definite diagnosis of a heart attack (myocardial infarction) as a result of coronary artery disease, resulting in the death of a portion of the heart muscle. This event must require hospitalisation and investigation in a coronary care or similar unit, within 72 hours of the heart attack.

To the average person this definition might seem fine until you break down the conditions required by the policy.

Firstly, the heart attack must result from Coronary Heart Disease (CHD). A simple definition of CHD is:

…A disease in which a waxy substance called plaque builds up inside the coronary arteries. These arteries supply oxygen-rich blood to your heart muscle. When plaque builds up in the arteries, the condition is called atherosclerosis.

But consider that a heart attack can also be brought on by something as innocuous as a bee sting resulting in anaphylactic shock or the reaction to extreme stress. Remember that only in June this year the heart of Port Adelaide Football Club’s List Manager, Jason Cripps, stopped beating while jogging, brought on by a virus and not coronary heart disease. Although Cripps suffered cardiac arrest without suffering a heart attack, this incident underscores the point that heart disease is not necessarily a precursor for many conditions that can affect the heart.

The second requirement to fulfill the policy’s definition is treatment in a hospital’s coronary care unit within 72 hours. Again, this may sound reasonable, but about 30 per cent of people who have suffered a heart attack may have atypical symptoms, such as heartburn or tiredness, with women more likely than men to present atypical symptoms. This group may not suspect that they have suffered a heart attack, so there are a number of reasons why a person who has suffered a heart attack may not present themselves for a medical examination within 72 hours. Those who live in remote areas are also disadvantaged by this clause and must rely on the ‘good will’ of the insurer if confirmation of heart attack exceeds the 72 hours deadline.

This definition has two clauses that reduce the insurer’s chance of having to pay a claim for heart attack. But are there better alternatives? The provider of this policy is not obliged under the rules of General Advice to inform the purchaser of alternatives. There are other policies that avoid these two clauses, and which also contain superior features that increase the likelihood that the consumer will receive the full benefit payment for a heart attack. In addition, many policies will even make a partial payment of benefit for something as common as the insertion of a stent in one of the heart arteries.

Seventy percent of all critical illness/trauma claims are for either cancer or heart attack. Again, you can find similar points of difference between the various definitions for Cancer. An experienced adviser can point out the differences with these and other medical condition definitions under a Personal Advice arrangement.

Not seeing a tsunami or an economic event coming is excusable; building something fragile to them is not

It’s not as if insurance policy designers are unaware of what the competition is offering; they deliberately create products with inbuilt weaknesses. Realization of this fact occurred when I compared the definitions of two policies owned by one of the big four banks. In addition to fewer defined medical events the definitions for Heart Attack and Cancer in their policy promoted via mail out under General Advice had the bar set higher for a successful claim when compared to their other policy sold under Personal Advice.

Nassim Taleb, who came to prominence as the author of The Black Swan said in his book entitled Antifragile, “Not seeing a tsunami or an economic event coming is excusable; building something fragile to them is not.” The same observation should also apply to those that deliberately create insurance products with flawed definitions. Nothing as important as a life insurance policy should be offered to the consumer unless the needs of the purchaser are taken into account and the strengths and weaknesses of the recommended policy are pointed out in a written report. Without knowledge of what to look for in a policy and being told to read the fine print in Product Disclosure Product will be next to useless.

Why does parliament allow parallel worlds of Advice and No Advice when it comes to the purchase of life insurance? I suspect that there a number of reasons. Firstly, life insurance and its ancillary products are complex and most members of parliament don’t fully understand how the consumer can be short changed. Secondly, life insurance sold under General Advice is very profitable, so there are powerful interests driving its promotion. Finally and sadly, most parliamentarians don’t care enough. It will only be when there is a groundswell of consumer discontent coming from dishonored claims that something will be done.

Until that day, why would consumers want to rely on their own limited understanding of insurance policy definitions when they can rely on someone who is legally obliged to act in their best interests?

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