Are you a stay at home parent that watches a little bit of day
time TV, or have you had a sick day and watched TV during the day? If you
have, then you have more than likely seen the constant advertisements both in
the commercial breaks and the infomercials during the morning TV shows for
personal insurance;
generally death cover and income protection.
I have to admit, they do a great job at advertising their
insurance. With the background music, the acted out examples of someone being
off work and needing income protection, happy families etc. and also someone ringing up to take out an insurance policy.
They also like to give you the cost of the cover in small frequencies,
generally telling you the cost in a daily or weekly amount, so that it feels
like it is less expensive. "$3 a day - less than a cup of coffee"
sounds a lot better than "more than $1,000 per year". While $1,000
per year seems like a lot of money, $3 per day is nothing, right?
Don't get me wrong, I do believe many Australian's lack adequate
personal insurance and if those advertisements help families take out
additional cover, then this is a good thing. But is it really as
attractive as they make out? It doesn't take too long to see that the answer is
a resounding no. If you visit the Real Insurance website, you can view their
commercials to have a closer look and make a comparison.
In the commercial, it gives an example of a 36 year old female receiving
$5,000 of income protection cover. The cost of this is $32.33 per month.
Firstly, if you look at the small text in the advertisement, it says it is for
cover with a 90 day waiting period, payable for 6 months. This means that in
order for an individual to be entitled to receive any form of payment, their
illness or injury would need to be serious enough to prevent them from working
for 90 days.
Most Australian families with a mortgage do not have sufficient
cash reserves to provide for the family for 90 days. Also, the advertised benefit only lasts up to
6 months. What happens then? There is a reasonable chance that an illness
or injury, that is considered serious enough to keep you out of work for an
initial period of 3 months, is likely to also prevent you from working for longer
than the additional 6 month period (9 months in total). According to
Financial Advisers Australia, when a person is off work for more than 3 months,
the average duration of claim is 4.2 years1.
The company’s Product Disclosure Statement for their income
protection product also states that they will not pay a claim for a sickness or
injury which is a direct or indirect result of a mental health disorder or
illness. According to AMP claims statistics from 2011, in 19% of all
claims, the leading single cause of a claim, was as a direct or indirect result
of mental illness2.
I have compared the cost of the policy advertised in the Real
Insurance advertisement with a retail policy for the same 36 year old white
collar non-smoking female. You could have
a policy which has a 90 day waiting period, however instead of the 6 month benefit
period advertised by Real Insurance, the retail policy has a benefit period of
2 years (as a 6 month benefit period is not available on retail policies) and
costs $32.26 per month (which is almost identical to the cost of the Real
Insurance policy). This retail policy also includes cover for mental health illnesses,
subject to underwriting. So for virtually the same cost, you have a longer benefit
period as well as a policy that includes mental health, which as previously discussed
is the leading cause of claim for income protection.
Other comparisons between
direct and retain insurance, include:
- Direct
insurance only allows for self-ownership; the policy cannot be owned by superannuation,
which is generally the best ownership option for death cover. In addition,
the policy cannot be owned by a third party.
- Direct
insurance does not allow the option for level premiums. Level premiums
allow the individual to take out cover that doesn't increase in cost each
year as a result of the individual’s increasing age. In the long
term, this can result in significant savings for the policy holder.
- Although
direct insurance allows individuals to choose the benefit period on income
protection, their maximum benefit periods are still considered short term
(either 2 or 5 years). They do not provide the option for a benefit period
to age 65. This is not always suitable as generally speaking, most
young people are going to be reliant on their income for a lot longer than
2 or 5 years.
There are also many other limitations with direct insurance
policies and as I've shown above, they really are not the cheaper option.
To review your personal insurance and to discuss policies that will provide the most appropriate coverage for you and your family,
please give me a call on 1300 200 012 or email at glenn@precisionwm.com.au.
1 http://www.faa.net.au/income_protection.html
2 https://www.amp.com.au/wps/amp/au/FileProxy?vigurl=%2Fvgn-ext-templating%2FfileMetadataInterface%3Fids%3Dde9fcbaafdc7d210VgnVCM1000001903400aRCRD
