Nick Bruining: The ‘loyalty tax’ rip-off in your life insurance and why you’re paying more than you should

West Australians with established life insurance policies could be paying a hefty “loyalty tax” on their cover, which could be a staggering 89 per cent more than what they might have otherwise been paying. And while some customers might be limited in their ability to change insurers, others using a financial adviser should be asking some tough questions. Life insurance broadly includes death, total and permanent disability, income protection and trauma insurance cover. Following the prohibition of automatic life insurance for low-balance superannuation accounts five years ago, it’s generally accepted that most Australians now have insufficient life cover in place. Nearly three-quarters of all life insurance is taken out through employer super funds, direct purchase or retail insurance products that are distributed online or through financial advisers. In many cases, direct insurance premiums can be cheaper than group insurance schemes used by most super funds. In the past the reverse applied, but the mandatory removal of many younger super fund members from the insurance pool has generally meant the average age, and therefore the risk of a payout, has increased. The premium for a direct insurance policy is calculated for the individual, rather than a group of potentially older people, with a variety of health and lifestyle issues. Insurancewatch chief executive Wally Ripper said cost-of-living pressures were a big factor in complaints about premiums but were more of an issue for longer-term customers. “Consumers giving positive feedback had held their policies for only 2.7 years on average. But those expressing dissatisfaction had held their policies much longer, for more than 8.1 years,” Mr Ripper said. Analysis by Insurancewatch had shown obvious reasons include life insurance premiums rising with age, but also a general increase in the cost of disability-related cover due to increasing claims over the past five year. “Competitive pressures over the last five years have generally pushed retail life insurance premiums lower. These results also suggest a loyalty tax exists,” Mr Ripper said. According to Insurancewatch, for those aged over 45, premiums had fallen about 20 per cent over the past five years. In one example for a $200,000 “trauma plus” policy for a 40-year-old, non-smoking accountant, the premium ranged from $601 to $1137 a year — or an 89 per cent “loyalty tax”. “If they have a life insurance policy which is more than five years old, they should be asking to see premium comparisons,” Mr Ripper said. Certified Independent Financial Advisers Association president Chris Young said part of the problem lies in the structure of the industry. “In almost every case, financial advisers are receiving a commission based on the size of the premium,” Mr Young said. “That means there’s a disincentive to chase a lower premium for the client. The other issue is that many advisers can’t access rival policies, which might be cheaper.” Financial advisers who are not independent are tied to an “approved product list”. The APL is set by the parent company and when that company has its own insurance products or distribution agreements with certain insurers, rival companies cannot be recommended. Unfortunately, changing insurers is not always a simple process. Unlike group insurance policies where, in most cases, you simply need a statement showing proof of cover, retail insurers generally require new underwriting. Underwriting is the process where an applicant is individually assessed, initially off the application form but in some cases follow-up investigations are conducted before cover is offered. For this reason, existing cover shouldn’t be cancelled until the new policy is available. While sites such as Insurancewatch provide useful comparisons between some insurers, be aware that not all insurers are listed and other better deals may be available. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association