Why you shouldn’t buy life insurance from the TV until you read this

There have been a lot of ads recently promoting life insurance usually including some true stories about how insurance has helped their family, and I am really pleased that this is bringing insurance to the front of people’s minds. It’s a positive step. I don’t however believe that this gives people the full picture, or enough information to make an informed choice. So, if one of your new year’s resolutions is to sort out your insurance, then take 5 minutes to read this post before you get your insurance ‘sorted’ over the phone.

There are 2 general types of life insurance: direct insurance, which is where you go through an online system or over the phone, and then there are retail products which you need to obtain either through a financial adviser, insurance broker or through your local bank.

Most people would think that insurance is insurance and there can’t be much difference between the two, but you couldn’t be more wrong. Whilst there are a variety of differences, let me point out the most important parts to make it easier.

Type of advice

When you get a direct product, the call centre over the phone won’t provide you with any personal advice or make any recommendations about whether the products and sums insured are suitable for you. This means they will not be responsible for the ‘selections’ that you make. They also will not make any recommendation about the ownership structures or premium frequency.

With retail insurance, you will usually go through a full ‘needs analysis’ process, which means the advice is specifically tailored to you and your families needs. This includes the amount to be insured, as well as the specific products as some products may be more beneficial for your specific needs.

Pre-existing illness

Some direct products will set you up with insurance over the phone asking the most minimal of medical questions. If this is the case, there is usually a very interesting clause within your insurance policy that will potentially affect your payout. It is called the pre-existing illness clause. This means that the insurance will not cover you for any illness or injury that you have previously had or been effected by. Now think back to your medical history, we usually all have something at the back of our closets, and at claim time, insurance companies can get access to your Medicare records. Scary thought, isn’t it.

With retail insurance you need to go through a full underwriting process up front. This means that you need to complete a full application form, and depending on the level of cover you are after, you will need to go through medical tests, and the insurance company may request medical reports from your doctor. Now I know what you are thinking, that seems like a lot of work, and you know sometimes it can be, however all the hard work is done at the front end. At the time of claim, you will know exactly what you are covered for. If you do have any exclusions you will know about it from the outset.

Any insurance product with a ‘pre-existing illness’ clause, will do all this investigative work when you make a claim. Firstly, this will hold up the claim process meaning that your money will take longer to get to you when you really need it, but also, if they find something in your medical history that relates to your current claim, they may not pay at all.

Claims process

Put simply, you either get help or you don’t.

With direct insurance, you will have to navigate the claims process by yourself. There are usually forms, statements and medical reports to provide. These forms can be confusing and onerous.

With retail insurance, it is usual process that your financial planner helps you with the claims process and deals with the insurance company on your behalf. That way you can focus on getting better.

What are you actually covered for?

Generally speaking the direct insurance products do not cover as many medical conditions as retail insurance products. Direct products rarely have extra features and benefits that can also make a lot of difference. You need to check your product disclosure statement (PDS) for the full details of what you are actually covered for. The devil is in the detail.

The good news is that direct insurance products are not necessarily cheaper than retail products. If you can get a superior product, help along the way, better definitions and someone to help you at time of claim, wouldn’t you rather get a retail insurance product?

For the women out there, here is the best analogy for me to explain this. When you dye your hair at home verses going to a salon, the outcome will never be as good as a salon job. The difference with this though, is that the ‘salon’ job is not necessarily more expensive, the cost is comparable, if not cheaper in some circumstances.

If a salon job cost the same as a home job, I would much prefer someone to do it for me, that’s for sure.

– This post is from our resident senior financial planner, Cara Brett. Check out her details in our about us page.

Posted in: Insurance and Cara Brett