Direct life insurance – If it seems to good to be true, it probably is

Brad Fox

Buying life insurance over the phone or online after just a handful of questions should set off alarm bells, the Association of Financial Advisers (AFA) warns.  It means the policy has not been underwritten and at claims time, consumers may well find out they were never covered.

“As is often the case in life – if it seems too good to be true, then it probably is,” said AFA CEO Brad Fox. “Buying life insurance without a financial adviser might be faster up front, but the sting is in the tail.”

For this reason, the AFA is calling for all life insurance to be underwritten at application time to ensure a better claims experience for consumers.

Mr Fox said while over the past few years the opportunity to access life insurance directly has opened to consumers, this accessibility has not transpired into a better claims experience, a situation the AFA argues could be changed with timely underwriting.

“Clearly, the consumer experience when purchasing direct life insurance may be perceived as better because the customer only has to answer a handful of questions, doesn’t have to go through the underwriting process, can make the purchase via credit card and have immediate cover put in place,” said Mr Fox. “But what have they actually bought? What happens at claim time?”

A recent survey by Roy Morgan highlighted the positive customer feedback when accessing direct life insurance. However, Mr Fox said the survey failed to highlight the full picture which is the poor claim outcomes of direct life insurance.

“It is absolutely clear that the best way to reduce the risk of a policy not paying out at claim time is to see a financial adviser to arrange your life insurance needs,” he said. “It will take longer to put the insurance in place because it will be carefully underwritten in line with your individual medical and family history before it is offered to you. This gives you greater certainty that you are covered if you have a claim.”

Mr Fox said consumers don’t have the same certainty with buying life insurance directly because these policies are not usually underwritten until the claim is lodged.

“At claim time, if a direct insurer determines you had health issues back when you purchased the policy, or even in the years before, they may only refund the premiums and not pay out,” he said. “We think that is unconscionable.”

Financial advisers arrange just on half of the life insurance in Australia, and $5B of the total $7.2B in claims is paid to clients of financial advisers.