The average age a person discontinues one or more of three types of living insurance policies – cover for disability, critical illness/trauma and income protection – is 45 years yet the average age for a claim is 46.5 years.

This analysis for the 12 months to September 2013 for advised policies of living insurance* does not include traditional life insurance where a lump sum is paid upon death.

TAL Group CEO Jim Minto said the figures were disturbing because they demonstrated how these customers who stopped their policies were statistically doing so at the time when they were most likely to need financial protection.

“We know that cost of living pressures are continuing to force people to rethink their domestic budgets but it is very unfortunate that those people who stop their policies for this reason do not see financial protection as essential for themselves and their families,” Mr Minto said.

“Basically, those people are betting that statistical averages will not apply to them so they can use the saved money for some other part of the household budget.

“A family’s future income is their most important asset. If that income stops due to accident or ill-health it can be devastating for a family both financially and emotionally in terms of lifestyle changes that may have to be made.”

The average age a person takes up living insurance is 37.5 years, which means that the average lapse or discontinuance is 7.5 years later at 45 years of age and the average claim is made nine years later at 46.5 years of age.

Additional analysis of income protection only shows that half of all current claims for that category are made within 24 months of the policy being taken out (1 in 2), compared to a claim rate of 40% two years ago (2 in 5).

And, incredibly, the time between taking out income protection and making a claim is now 1.25 years shorter than it was just two years ago, reducing from almost 6 years to 4.7 years.

Mr Minto said this new analysis underlines the industry trend for people to increasingly claim on their life insurance products, with TAL’s own total claim payout figure rising 45% last year to $843 million.

“The increasing rate of life insurance payouts being made is really good news because it demonstrates the value and need of life insurance in protecting customers and their families when they most need it but I do worry about those who stop their policies when they are most likely to need it,” Mr Minto said.

“Life insurance provides peace of mind, helping people sleep better at night, but there is a tangible benefit with claim payments helping people not only protect the life they have created but the one they have dreamed of for the future.”

* Advised policies of living insurance make up the following types of insurance sold through the financial adviser channel: disability – lump sum upon permanent and total disability; critical illness/trauma – lump sum upon medical event such as heart attack; and income protection – regular income payment upon defined illness/disability.

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Private insurance could reduce the NDIS and DSP burden: FSC

Life insurance can play a major role in reducing government welfare expenditure on the Disability Support Pension (DSP) and National Disability Insurance Scheme (NDIS) according to the Financial Services Council.

In its pre-budget submission to the Federal Government, the FSC says it is timely to consider whether the costs of the DSP and NDIS could be partially defrayed through personal disability insurance thereby transferring the risk to the private sector.

John Brogden, CEO of the Financial Services Council said: “The DSP is increasingly eating into the federal budget. In the current financial year the DSP cost the government $15.5 billion and this will increase to $18 billion by 2016-17.”

New research conducted for the FSC by KPMG shows 9.5 million Australians – 44 per cent of the population – could mitigate the economic risks of disability through personal disability insurance.

There were more than 50,000 new DSP claims in 2012-13.  If working Australians were adequately insured for disability, the government would save $340 million in the first year for new recipients of the DSP. In the tenth year this would equate to annual savings of $2.5 billion.

“The contribution of superannuation and life insurance will be critical for the Australian economy in the medium to long term,” Mr Brogden said.

“There is an opportunity for the government to share the financial risk and budget expense associated with acquired disabilities to the private insurance sector under the right policy settings,” Mr Brogden said.

He said a higher take up of private disability insurance would reduce pressure on public finances and will be likely to deliver a higher standard of living for disabled Australians.

The FSC’s pre-budget submission has recommended the government considers tax incentives and disincentives to increase the level disability coverage through private insurance and that the McClure Review of welfare payments considers how private insurance for disability could reduce the increasing use of the DSP.

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