ASIC’s review of the sector and its executives’ associated comments to a Senate estimates committee have publicised what some have known for years. Standing back from the headlines, there are some everyday realities about life insurance — indeed any insurance — that if more widely known would make everyone’s life a bit easier.
A policy is a contract
All insurance policies are contracts and, in most cases, the contract is written by the insurer. These documents are written by lawyers and it’s not unusual to see the use of complex terminology and complex document structures.
No doubt it’s hard for people with little understanding of life insurance or the law to understand these documents.
The seeking, offering and acceptance of all insurance products is a legal process and needs to be seen as such by everyone seeking insurance.
About 22 Australian life insurers offer products to retail consumers, sometimes via super funds. For these policies, the insurer also must issue a product disclosure statement that details all the main features of their product. These documents must have a specific structure and are technically easier to understand than the contract document.
The price of anything is important, but it can be a false economy as cheaper policies typically have more restrictive terms and conditions.
Your duty of disclosure
In order for an insurance company to assess if it wants to enter into a contract with you, it needs relevant background information. In relation to life insurance, it wants to know your occupation, age, sex, the medical history — both personal and family — dangerous recreational pursuits and so on.
Under legislation, you have a duty to answer an insurer’s questions as honestly and completely as possible. This obligation typically lasts until an insurer formally issues the contract. That is, you have to tell the insurer anything that may be relevant to its acceptance or rejection of your application until the contract starts.
If you fail to disclose some piece of information about yourself, the insurer can deny a claim on the basis that had it known that information it wouldn’t have agreed to issue the policy.
Clearly, this step is vital and I suspect many financial advisers and insurance clients do not take it seriously enough.
Underwriting
The next tricky bit is underwriting. This involves an insurer assessing your application and sometimes seeking additional information from you, your doctor, medical specialists and even third-party evidence of financial information.
This can have an unexpected benefit. When applying for life insurance some years ago, my insurer wanted me to have an electrocardiography.
This identified an unknown problem with my heart’s electrical system, for which I now have regular check-ups.
That said, some life insurers make this process painful, especially when a small business seeks a large insurance amount. Their starting point sometimes seems to be to doubt the validity of all financial information on the basis you may have overstated your income.
Do I need cover?
For some, the answer will be peace of mind, knowing that their family will have greater financial security if the worst were to happen. This is a nice way of saying we take out insurance to make a claim. And whoever makes that claim wants it paid as quickly as possible.
The best way to deal with this issue occurs before an insurance contract starts. You need to understand the contract including its key terms and you must disclose all information the insurer asks for.
When making a claim, you need to know process.
• Is the information being asked for needed or is it a fishing expedition?
• How to hurry up a claims area that is taking too long.
• When to contact a doctor to hand over documentation.
• When to make a formal complaint because the insurer has made the wrong decision.
For most of us insurance is a key cost, so it’s worth understanding these basics.
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