The opportunity of under-insurance
With research illustrating the high costs of under-insurance, advisers have a vital role in helping consumers understand the importance of adequate insurance cover, Jim Minto writes.
Due to superannuation and direct channels, more people than ever before now have access to life insurance cover, and that is fantastic.
However, peoples' lives seldom remain static, and lifestyle changes like a salary increase, buying a home or the decision to start a family, can quickly result in people not having enough cover for their protection needs.
Despite a six-fold growth in Australia's life insurance market in the last 15 years, Australians still have significantly less cover than they should.
In the unfortunate event of death, insufficient insurance means you have far less cover than you might need. Insufficient insurance cover means you will not be able to provide full protection for loved ones to pay off the mortgage, let alone provide enough capital to protect the family out into the future.
Default cover
The problem with taking out life insurance through workplace superannuation is that most people end up with little more than a default option, which is really only designed to offer a very basic level of cover.
However, a growing number of people are making conscious choices not to have extra cover. Instead of buying the cover they need, people are rationing the household budget and only buying as much cover as they feel they can afford.
With Australians underinsured to the tune of $10.6 trillion, according to research by actuarial company Rice Warner in 2012, the life insurance industry has a significant opportunity to continue closing the under-insurance gap, which has reduced considerably in recent years.
What is helping to address under-insurance the most is the growth that has occurred through direct channels and notably workplace superannuation arrangements, which have complemented the retail or adviser channel as people increasingly do their own research on products and services.
This year we expect to see close to 40 per cent of the life market premiums being delivered through workplace superannuation.
If you have a major health issue, you want to have protection, and you want to have that ability to go to a specialist and hospital for the treatment you need, when you choose to have it.
Then there is 10-15 per cent of the market where people have brought life coverage direct.
Bridging the gap
Continuing to close the under-insurance gap comes down to people having a greater level of awareness, so they can make informed choices.
The vast amounts of life insurance currently being transferred into superannuation reflects a growing willingness for cover to be paid out of superannuation rather than regular income.
To equip people with sufficient information needed to make conscious choices about their level of life cover, life insurers like TAL are providing consumers with web-based online tools. For example, online calculators help people independently work out how much cover they should need.
But just because people are under-insured does not mean they are going to fix that problem, especially if they are unaware of it.
That is why TAL, like other life insurers, is continuing to provide people with enough information on which they can make conscious choices.
If people do not have enough cover, it typically falls back on the government, communities and families.
Rice Warner estimates life under-insurance costs the Australian Government $1.5 billion a year in social supports. If someone is in a very bad situation, then it can also place extra onus on families to help out.
This presents an opportunity for advisers to engage more with consumers to help them better understand the need for adequate levels and appropriate forms of financial protection.
Being self-determined
You buy car insurance because you want to be protected if you have an accident. It is the same for your house or contents: if you have a loss you want to be in control and you want to have choices.
You buy health insurance for the same reason. If you have a major health issue, you want to have protection, and you want to have that ability to go to a specialist and hospital for the treatment you need, when you choose to have it.
So life insurance is really just another example of a conscious choice people need to make. Once people become more aware of these issues, they are more able to make intelligent choices to protect against losses if something goes wrong.
The more aware people become, the more likely they are to be mindful of their life insurance options, and that is the best possible way of solving this under-insurance problem.
What is making under-insurance a more acute issue for society at large is the move away from a welfare system where we saw a big growth in government-provided social service payments and protection after World War II.
These days, governments are running deficits around the world, and they are reducing benefits and support for people. Australia is no exception.
In light of these developments, it is a great idea to be more in control of one's destiny, to have as much superannuation as you can, and as much life protection as you need cover for in case you could never work again.
Helping more aware consumers better understand their protection needs is a big opportunity for the advice profession.
Jim Minto was the former TAL Group CEO (retired 31 March 2015).
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