The recent scandals around life insurance
A 2016 ASIC investigation into the handling of life insurance claims revealed rates of declined claims that were alarmingly inconsistent between different policy types and insurers.
The report also found inconsistencies between specific terms and definitions between insurers, which lead to many consumers buying policies that wouldn't actually payout.
In response to the recent controversies, we've put together a comprehensive policy guide .
Source: ASIC 2016
Who's this guide for?
This guide looks at the various types of life insurance and the best ways to avoid ending up with a policy that provides insufficient cover. Read through this guide if:
1. You’ve lost confidence in your life insurance provider
2. You're reconsidering the usefulness of life insurance
3. You're thinking of switching providers
4. You're a first time buyer
Pros and cons of each option
Using an adviser
Obtaining insurance through a financial advisor who may or may not be affiliated with the insurer and who may or may not receive a fee or commission from them.
- An advisor can help you identify your personal needs;
- Tailor coverage towards your personal situation
- Help you with the application process
- Help you understand the terms of your policy
- Help you make a claim in the future
- Can be more expensive as you'll often pay a commission to the adviser
- Application process can take longer
Relying on group cover
Usually through a superannuation policy, where the trustees provide a default level of group life insurance to the fund’s members.
- Cover is automatically included with your super or from your employer
- May be easier to get cover for pre-existing medical conditions
- No medical checks in most cases (generally no underwriting for cover under a certain limit)
- Automatically deducted payments
- Minimal to no application
- The cover level is a basic default amount
- You may not be able to continue cover if you change jobs
- Cover for pre-existing medical conditions may be removed if you increase your cover or change jobs
Usually bought direct from the insurance website or over the phone or a sales partner such as a bank as well as marketing companies.
- Convenient option if you know what to look for in a policy
- Can work out cheaper for those with basic life insurance needs
- Basic medical exam (Generally no underwriting
- There are less steps during the application process in some cases
- You'll have to go through application process by yourself
- No adviser to clarify the policy terms and conditions
- No cover for pre-existing medical conditions
When applying for life insurance it's crucial to understand the key differences in requirements between a direct and an advised policy.
- 1. Determining the type of cover. That is, how much cover you need, what type, the right brand, how to structure and the right type of benefits for you.
- 2. Completing and submitting an application form. This asks questions about your health, financial situation, lifestyle and pastimes
- 3. Having your lifestyle statements and medical history assessed. Insurance underwriters will assess factors such as age, health, cover applied for and sum insured, and supplying any additional information required such as a letter from your doctor or a medical exam
- 4. Agreeing to any revised terms. These are proposed by the insurer. If an agreement cannot be reached then the application process is ended.
- 5. Receiving the policy and confirming cover. This will include details such as sums insured, any special conditions or exclusions and cover commencement and end dates
Why are the steps sometimes so detailed?
The reason the application process is so thorough when using a financial adviser is because the underwriting is sometimes done at the time of application, unlike many policies bought direct from the insurer where the underwriting occurs at the time of making a claim.
Additionally, an adviser will take you through each step meaning a more thorough approach is taken.
The steps involved in applying for a life insurance policy direct from the insurer are typically straightforward, which is why such policies are becoming increasingly popular. In many cases, you will:
- 1. Go online
- 2. Complete an online medical questionnaire
- 3. Provide personal details, employment status
- 4. Agree to duty of disclosure
- 5. Agree to an exclusion clause for pre-existing medical conditions, suicide, self inflicted injuries, dangerous jobs and life styles and genetic conditions.
- 6. Cover is activated
By contrast, applying for life insurance through an adviser involves a lot more questions and health-related declarations, possibly including a request for a medical examination and the provision of a full medical history.
- Direct from the insurance website or over the phone
- From a sales partner, agent or affiliate of the insurer such as a bank
- Via a telephone or email marketing company acting on behalf of the insurer
Important questions to consider
Why is there no medical examination for a direct policy?
No medical exam is required for a policy purchased direct from the insurer for the same reason that no other health-related questionnaires or declarations are needed: because the policy is one-size-fits-all. In place of any detailed underwriting, such policies contain a pre-existing conditions clause (see below) which only comes into effect at the time of making a claim.
This clause stipulates that no benefit is payable if the reason for the claim existed at the time of taking out the policy. In other words, if you had a heart condition at the time of applying (even though there was no questionnaire) a subsequent claim related to a heart problem would probably not be paid.
What are some drawbacks to be mindful of when it comes to direct cover?
- Basic nature. Because the policy has no up-front underwriting, it is usually very basic, offering few benefits and providing only limited cover.
- Direct claiming. The insured or their beneficiaries must claim directly from the insurer at a time of loss and emotional distress, whereas an adviser can act on the insured’s behalf in managing the claims process with the insurer.
- More exclusions. Direct policies generally have more automatic exclusions than advised policies.
When should I consider a direct life insurance policy?
Despite it's drawbacks, there are some advantages to direct life insurance policies. For instance, the application process is fast and easy and if you are in good shape, it can be a convenient way to purchase insurance.
Additionally, not all direct policies are one-size-fits-all. Some insurers offer more tailored products that are partially underwritten during application, such as Virgin Money’s retail product, which offers a reduction in premiums in return for more information regarding your health and lifestyle.
Some direct policies are tailored
Note: Some direct policies will offer a “tailored” option which underwrites during the application process instead of making assumptions and underwriting at claim time.
Did you know you may have already have life insurance?
Many people aren’t aware that they may have life insurance as part of their superannuation that is provided to a group of people (e.g. employees). Many super funds provide a default level of life, TPD and income protection cover for their members. You will usually have the option of either:
- Increasing this level of cover, or
- Opting out of cover altogether and thereby keeping more money in your retirement fund
What are the common traps to be wary of?
The recent ASIC investigation into life insurance highlighted disclosure problems between fund trustees and their members.
A common complaint from people holding life insurance through their superfund is that the communication between them and the trustee of the super fund is often infrequent and unclear. Many policyholders are:
- Unaware that they even have life cover
- Unsure of how much cover they have
- Unsure of what their options are in relation to this cover
- Unaware of what changes will void their cover
The recent ASIC investigation into life insurance highlighted disclosure problems between fund trustees and their members. ASIC indicated it would be looking into this issue in the future.
How much cover do I have included in my superfund?
The amount of life insurance cover you have through your super will be at the discretion of the fund’s trustees, but generally it will only be a rudimentary amount, which is why many members opt to increase their level of cover.
Why is life insurance automatically included?
Having life insurance through super is a way for everyone to have some level of cover, particularly those who can’t afford standalone cover, but the downside is that if you leave your job, coverage may not follow you and you may find yourself without any life insurance at all.
How can I tailor my cover to be more comprehensive?
One way to avoid losing your coverage and to increase your cover to a more adequate level is to perform a superannuation rollover.
This involves transferring money from your super fund into an independent insurer’s superannuation life cover plan. This money can then be used to pay your premiums for life, TPD and income protection cover.
Pre-existing medical condition? Make sure you read this.
Although many super funds provide automatic qualification for group life insurance with no medicals required, there are still situations when claims are denied on the grounds of pre-existing medical conditions. Exclusions can apply to existing conditions if you:
- Are not working when the cover begins
- Have taken more than 10 days of sick leave in a row in the last 12 months
- Transfer to a new fund that excludes pre-existing medical conditions
- Are you eligible to receive a payment from another source
- Increase your cover
- Change occupation category
Stopping work and cover
John had been with his super fund for over a decade. Then he suffered a stroke, after which he returned to work. He remained working for a few months and then stopped employment, claiming a disability pension from Centrelink and lodged a claim with the trustee of his fund.
When John initially returned to work
During this time his super fund had also changed insurers with an increase in cover. The new insurer denied John’s claim. The insurer stated that John was not eligible to make a claim in this circumstance, as he was:
- Not “actively employed” at the time
- Suffering from a pre-existing condition
John's situation may of been prevented if he had disclosed his condition at the time his cover was changed. The insurer would be able to either:
- Advise if he was deemed no longer able to work and reach an agreement on a disability payout
- Or continue to cover him
In order to obtain a policy that is clear with what they will and won't cover you for, it's important to disclose relevant personal information upfront. To maximise the likelihood of you being able to make a claim, be sure to have the following types of personal details on hand when you apply:
For a successful application, you will need to provide your insurer with details regarding your other and past insurances, being as accurate as you can. These details may include:
- Whether you currently have or are applying for cover with any other insurance company
- Whether any insurance company has ever indicated they would not insure you or would apply conditions to your cover
- Whether you have claimed unemployment benefits in the last five years or plan to claim them in the next 12 months
- Whether you have ever claimed or intend to claim any insurance, government or armed forces benefits
These might include:
- Whether you have ever been a smoker and whether you have ever been advised to reduce your smoking due to a medical condition
- The number of standard drinks you consume per week and whether you have ever been advised to reduce your alcohol intake
- Whether you have ever used recreational or non-prescribed drugs
You will also need to provide details of your previous doctor(s), which would typically include:
- Name, address and phone number of your current doctor
- Name, address and phone number of your previous doctor if you have known your current doctor for less than two years
- The details of your last consultation with any doctor, including the doctor’s name, the reason for the consultation, the outcome and whether you were referred to a specialist for further tests
Details of your personal health history will also be required in your application, which could include:
- Your height and weight and whether you have gained or lost weight in the past 12 months
- Whether you have ever had or experienced symptoms of a range of listed conditions, even if you have not seen a doctor about them
- If you are male, whether you have had any disorder or problem of the prostate or testicle
- If you are female, whether you have ever experienced any complications with pregnancy or childbirth (if you are currently pregnant), received abnormal pap smear results or had lumps or pain in your breasts
- Whether in the last five years, had any other medical tests, used any other medications or had any other illness or injury that has prevented you from working for more than three consecutive days
- Whether you have had a genetic test and if so, what the results were
- Whether you have ever been admitted to hospital for any reason
- If you are currently experiencing any symptoms or complaints for which you have not consulted a doctor
- If you are awaiting any medical advice, investigation or treatment including surgery
- Whether you or any of your current or previous sexual partners have tested positive for HIV/AIDS
You will also be asked for details of your family history, which might typically include:
- Whether any of your first degree (blood-related) family members have ever had any of a list of conditions such as stroke, diabetes, heart conditions and Alzheimer’s disease
- Whether you are required to have any regular screenings due to your family history or if you have any tests or investigations pending
Details of your sports and pastimes will also be required to further determine your level of risk and these might include:
- Whether you intend to or have taken part in aviation, motor racing, underwater diving, football, motorbike riding, rock climbing, hang-gliding, ocean racing, martial arts, horse riding or any other hazardous activity in the last 12 months
- If so, how often have you taken part and in what capacity (amateur or professional, competitive or non-competitive)?
Recap: Advised vs direct policiesMost advised life insurance policies require a detailed application with a lot of questions designed to tailor your cover.
Only some direct life insurance policies offer a tailored option. It is also your responsibility to decide what policy and level of cover is right for you.
Traps to watch out for in the application process
These traps could bite you in the back at a later stage. Some common mistakes people make when filling out policy applications can include:
- Failing to understand the definitions of terms within the policy
- Failing to disclose all relevant information to the insurer at the time of application
- Failing to understand the eligibility requirements for making a claim
- Failing to answer application questions correctly or accurately
The devils in the details
A policyholder was diagnosed with a kidney disorder and attempted to make a claim on their trauma insurance. Their claim was denied on the grounds that they had blood in a urine test prior to taking out cover.
Why was the claim denied?
The insurer argued that because the policyholder answered “no” to the question “Have you ever received advice or had symptoms related to disorder of the kidney or bladder including blood in the urine, kidney stones or a urinary infection”, they had failed to disclose a pre-existing condition.
Who might struggle to get full cover?
Some groups of people might find it difficult to qualify for full life insurance including:
- Anyone who has a pre-existing medical condition (within five years before applying for cover)
- Anyone with a history of suicide attempts
- Anyone who has a dangerous occupation
- Anyone who participates in a hazardous pastime or sport
- Anyone with a known genetic condition
Does this mean I simply can't get insurance?
If you fall into one of these groups then you'll either:
- Have to pay a loading on your premium and receive full cover
- Receive cover with special exclusions or conditions
- Be excluded all together from cover (not always the case)
Should I just keep these details a secret?
- No. It's in the best interest to disclose everything. The insurer will decide whether or not to cover you and offer you specific terms. Remember, failure to disclose can usually lead to a claim being denied or your policy being cancelled later.
What should I check before I purchase a policy?
There would be nothing more emotionally and financially frustrating than to pay premiums on insurance for a number of years only to discover that you have never been eligible to claim. This could happen unless you check your eligibility before you purchase your policy.
During the application: Check the exclusions on your policy
Exclusions that could restrict your ability to claim from the get-go can include:
- Pre-existing conditions. Having a pre-existing medical condition that is excluded from cover.
- Certain employment categories. Being in an excluded employment category (e.g. casual work, dangerous jobs) when applying for income protection cover.
- Non-residency. If you're not Australian citizen or resident, as this is often an eligibility requirement.
Understand the key definitions
Check your policy's definition for these common conditions before you buy. It's important to understand that these definitions will vary between insurers.
|Definition||Policy type to pay attention to|
|Severe rheumatoid arthritis||Trauma|
|Multiple sclerosis||Trauma and TPD|
|Pre-existing medical conditions||All policies|
Percentage of disputes involving policy definitions
Source: ASIC 2016
When am I eligible for a payout?
There is often a lot of confusion regarding a payout for both TPD policies. This section aims to point out the details that could affect your eligibility when it comes to TPD and trauma cover.
TPD (Total and Permanent Disability) insurance is a component of life insurance that provides long-term financial compensation if you cannot return to work due to total and permanent disablement.
How do TPD requirements vary with insurer
Eligibility requirements vary with insurers, and criteria where differences may occur include:
- The definition of disablement. Can vary from being “unlikely to ever work again” and “unlikely to ever be engaged in any occupation” to “likely to be disabled for life”
- The waiting period for eligibility. Can vary from “a six-month continuous absence from work” to “being out of work for at least three consecutive months”
- The period in work before the TPD event. Can vary from being “engaged in 12 consecutive months’ work before the event” to “engaged in full-time gainful occupation immediately before the event”
- The ongoing care requirements. Can vary from “following the advice and care of a specialist” and “taking steps to avoid further illness or injury” to being “under the regular care of a medical practitioner”
Trauma insurance provides cover if you are diagnosed with a specified illness or injury such as cancer or a stroke that is likely to have a significant impact on your life. Like TPD cover, definitions of terms vary with insurers, making close examination of the policy vital for determining eligibility to claim.
How do trauma requirements vary with insurer
Trauma-related variations can include:
- Diagnosis of heart attack severity. Prescribed diagnostic tests can vary, depending on the insurer.
- Diagnosis of stroke. Onset timeframes, the type of medical specialist required and the prescribed diagnostic tests can all vary with insurers.
- Diagnosis of severe rheumatoid arthritis and multiple sclerosis. The type of medical specialist and diagnostic criteria can vary with insurer.
- Diagnosis of cancer. There is great complexity in the definitions of cancers by insurers and terms vary widely.
What if I have a pre-existing medical condition?
A pre-existing medical condition is generally regarded as a condition you are aware of at the time of applying for insurance. Depending on its severity, insurers will often cover the condition (often for an additional fee) if you declare it at the time of application. However, if you fail to declare it and then make a claim for an illness or injury related to that pre-existing condition, it is likely your claim will be rejected.
Percentage of disputes involving the definition of pre-existing conditions
What counts as a pre-exiting medical condition?
While the meaning of a pre-existing condition is broadly understood, its specific definition can vary with insurers, so careful examination of the terms used in your particular policy is always important. For instance, a pre-existing medical condition can include (but is not limited to):
- An injury or illness you were diagnosed with, had symptoms of or were treated for prior to the policy’s inception
- Health conditions for which you needed to consult a medical practitioner or other health professional
- Conditions where the symptoms would have caused an ordinarily prudent person to seek diagnosis, care or treatment
How do I avoid claim disputes involving pre-existing conditions?
Because the onus is on the applicant to declare their pre-existing conditions, disputes between policyholders and insurers who refuse to pay claims often involve medical conditions which the insurer considers pre-existing.
This may include conditions which the policyholder:
- May not even have been aware of
- May have considered too trivial to be declared
- May have considered too long ago in their past
- May not have had formally diagnosed by a doctor
Insurers determine the relevance of a pre-existing medical condition to a claim
A policyholder was injured in a car accident and suffered a severe neck injury but his claim was refused because his insurer stated that an injury at a young age contributed to the neck injury.
Learning lesson: Disclose everything, even if you think it's minor
While this shows us that it is not always possible to foresee every reason why a claim might be denied, if you read a policy’s definitions carefully and declare any conditions you think might be relevant, you will still have a much better chance of avoiding a claim dispute involving pre-existing medical conditions. Be extremely thorough during the application process and consider your past medical history.
Follow these steps to ensure your claim goes smoothly
What are the initial steps involved in a life insurance claim?
While claims procedures vary with insurers and policy types, the initial steps involved in making a life insurance claim are typically the same. The insured or their beneficiaries contact the insurer and notify them of their intention to make a claim and the insurer conducts an initial assessment of the claim.
What are the key follow-up steps after you submit a claim?
Typically, within 10 days of being notified of the pending claim, the insurer will provide the insured with a claim form if one has not already been lodged. Then, once the claim form has been lodged along with the necessary accompanying documentation, the insurer will assess the claim in detail and decide whether it will be paid or whether more information is needed. If after examining all the evidence, the insurer denies the claim, they must provide written reasons to the claimant and inform them of their right to request a review of the decision.
What documentation will I need to provide?
Each type of cover will require you to provide different kinds of evidence in support of a claim.
If claiming for a death, you will need to provide:
- The deceased’s ID
- Death certificate
- Letters of administration.
- Proof of your own identity
- Your relationship to the deceased
- Your financial dependence on the deceased
- Copies of any financial settlements between you and the deceased (where applicable).
For employees, you will need:
- Evidence of your income including a group certificate
- Personal tax return
- Personal tax assessment notice
If you are self-employed, you will need a:
- Business profit and loss statement
- Business balance sheet
- Business tax return
- Business assessment notice
If claiming for a specified major illness, you will typically need to provide:
- Documents confirming diagnosis of the illness
- A Medicare report of your recent billed consultations
- Treating doctor’s consultation report.
- Reports from other insurers
Additionally, your insurer may request a review of your condition by a specialist consulting doctor if considered necessary.
If claiming for total and permanent disability, you will typically need to provide:
- A Medicare report of your billed consultations
- A treating doctor’s report
- Reports from other insurers
- A worker’s compensation report
You may have to undergo an independent medical examination and an employability assessment by an appropriate consultant.
How long will my claim take to be processed?
Average time taken for one insurer
Source: ASIC 2016
The timeframe for a claim to be processed varies with insurers and policy types and is dependent on a range of factors such as:
- The type of cover
- Whether waiting periods are involved
- The ability of the insurer (or trustee for group insurance) to manage and assess the claim
- The complexity of the claim
- The timely provision of supporting evidence
- Whether there is anything that needs investigation
If a claim doesn't go as you expected, you still have options.
Internal dispute resolution
If you are unsatisfied with a claim outcome, the first thing you can do is to complain to the insurer through their internal dispute resolution (IDR) process. As licensed financial services, all insurers are required to have such a process in place and they must attempt to resolve the dispute with you directly in the first instance.
External dispute resolution (EDR)
If you are unhappy with the outcome of the internal dispute resolution process, your next option is to seek help from an external dispute resolution (EDR) scheme. This is a free, independent consumer service that provides an alternative to going to court.
Australian insurers are required to be members of an ASIC-approved EDR scheme such as the Financial Ombudsman Service (FOS). Such a scheme can resolve your dispute through negotiation and if it sees fit, it has the power to make a binding decision on the insurer which could result in you receiving financial compensation. This is not always the case though and their main role is to seek a mutually agreeable solution, which in some cases may involve something as small as an apology from the insurer.
If you are unhappy with an EDR decision on your case, your next and final recourse is to take the matter to court, which may only be advisable if the amount in dispute is substantial.
Superannuation Complaints Tribunal (SCT)
If your complaint relates to group life insurance held inside superannuation, the Superannuation Complaints Tribunal (SCT) may be able to help. The Tribunal deals with complaints about the conduct and decisions of trustees, insurers and other decision-makers in relation to superannuation and typical complaints can include:
- Incorrect allocation of benefits
- Unreasonable payment delays
- Miscalculation of a benefit or payment
- Refusal to approve a claim
- Misrepresentation of terms and conditions
- Errors in annual statements
If the Tribunal decides it is able to deal with your complaint, it will attempt to resolve it through conciliation by reaching a mutually agreeable settlement between all parties. If conciliation is unsuccessful, the Tribunal will then review the complaint and make a decision, which is binding on all parties and enforceable by the Australian Securities & Investments Commission (ASIC).
If a scheme such as the Financial Ombudsman Service (FOS) decides in favour of your insurer, you are not bound by their decision and still have the right to take your complaint to court. But if it is a small dispute, this may not be worth your while, as court cases can be very expensive with no guarantee of winning.
If the dispute involves a large amount and you are determined to take the matter further, the best advice would be to consult a lawyer, who can quickly determine whether you have a good case to take to court.
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