Dispelling myths

As advisers we often discuss insurance needs with our clients as it is the most important foundation of any financial plan.

However we are sometimes surprised at the negative views clients have of life insurance. Here we dispel some common myths about life insurance to help you make informed decisions about your cover.

Myth # 1 – Life insurance companies don’t pay claims

  • There’s a common perception that life insurance companies will do everything they can to avoid paying claims.
  • In fact, 92% of all life insurance claims are paid in the first instance¹. As long as you fulfil your duty of disclosure when you apply for cover, and you are covered for the medical condition you are claiming for, you can be confident your claim will be paid.

Myth # 2 – I’m young and don’t have kids or a mortgage, so I don’t need it

  • Life insurance isn’t all about providing for debts and dependants. It is also about looking after yourself.
  • Think what would happen if you became ill or disabled and couldn’t work. If you didn’t have income protection, you would have to find another way to supplement your income – through friends or family. Having income protection means that you are more likely to be able to manage on your own.
  • There are benefits to applying for life insurance when you are young and healthy. It is generally cheaper and it means you will not have to worry about obtaining cover later if your health changes (see myth #3).

Myth # 3 – I won’t be covered if my health changes

  • Once you start your cover, what you are covered for under your life insurance will not change – even if your health declines.
  • In fact, you generally do not even need to tell your insurer about a change in your health unless you intend to make a claim.

Myth # 4 – You have to do lots of medical tests to get covered

  • Some life insurance products sold through financial advisers require some medical tests before you are covered, but it may be as simple as one blood test and a GP examination.
  • If you have an existing medical condition, you may be asked to provide extra information about your condition and insurers will generally write to your doctor for a report rather than require tests
  • You generally won’t be covered for pre-existing conditions, so it is important to establish upfront what those pre-existing conditions are. It is also important to answer all questions accurately upfront so any pre-existing conditions can be reviewed by your insurer for any impacts to your cover or ability to obtain cover.
  • That way you know exactly what is and is not covered under your policy.

Myth # 5 – I’ll be stuck paying for cover I don’t need

  • Life insurance is designed to change as your life changes, as your cover needs can vary significantly over your lifetime.
  • An example may be taking out life insurance when at time of marriage. You may want to increase your cover if you have children or increase your mortgage. But similarly you may want to reduce your cover if your children have grown up or you have paid down your debts.

Myth # 6 – The cover in my super is enough

  • Over 70% of Australian life insurance policies – more than 13.5 million separate policies – are held through superannuation funds*.
  • While this cover is great to have, many of these policies only provide the minimum level of cover employers have to offer, which is definitely not enough for most people.
  • In fact, Rice Warner* estimates that the median level of cover in superannuation meets is only 60% of needs for life cover (or just 38% for families with children), 13% for TPD cover and 17% for income protection.
  • *Insurance through superannuation, 2016

Myth # 7 – I’ll be covered by workers’ compensation

  • Workers’ compensation provides some protection for work-related accidents or injuries.
  • But it does not cover most illnesses, nor does it cover anything that happens to you when you are not at work. It is worth checking your state’s workers compensation legislation .
  • Even if you are covered by workers compensation, the benefits are typically capped in terms of the amount and duration of payments, which means the cover could fall well short of what you really need.

Myth # 8 – Only the main breadwinner needs life insurance

  • There is no doubt insuring the breadwinner is vital for any family’s financial security.
  • But if a non-working or lower income-earning partner became seriously ill or injured, their family would need a lot of assistance to replace their services within the home.
  • Imagine if a breadwinner had to reduce their working hours to look after their partner or young children, or employ outside help.
  • Either option could prove very expensive, which is why both members of a couple should consider the various life insurance cover options available – regardless of their role.