A Small Price To Pay To Avoid Financial Ruin

Sydney Morning Herald

Saturday August 2, 2008

Simon Hoyle

The life insurance industry is stepping up its attempts to persuade us of the need to ensure we all have adequate cover, writes Simon Hoyle. A united front could be the key to its success.

Coco's Patisserie in the city put its coffee prices up on July 14. It now costs $3.20 for a large flat white, takeaway. They make great coffee (and other things), and the price rise certainly hasn't put customers off: even as Starbucks closes its doors left, right and centre, business at Coco's remains brisk.

While we might think nothing of spending a few dollars on a coffee every day, few of us ever consider spending that much - or even less - on life insurance. Yet for less than $3 a day we could buy enough cover to protect our families and loved ones from financial ruin should something unexpected happen to us.

The financial services industry's representative body, the Investment and Financial Services Association, estimates that purchasing $750,000 of death cover and $4700 a month of income protection insurance for a 31-year-old man who's married with two children and earning $75,000 a year would cost an average premium of $2.83 a day.

The definition of the unexpected, of course, is that we never see it coming. If we could foresee an accident, trauma or even death, then we could at least make plans.

Yet the association's chief executive, Richard Gilbert, says only 20 per cent of Australians have adequate cover - that is, enough cover so that if the insured person were to die or become unable to work and earn an income, their financial commitments could be met and their family would be taken care of.

"[Adequate insurance] is important like this: People get injured at work and need cover - income protection, for example," Gilbert says.

"People have massive mortgages and need protection against illness and trauma. To rely on the state to help you just isn't an economic proposition."

Whatever the cause of Australia's under-insurance epidemic - and presumably it's not cost - the financial services association is moving to treat it. All but two of its life insurance members will join forces in a campaign to explain the problem and to develop effective and affordable solutions.

A "headland statement" issued by the association last August says its aim is to improve the breadth and depth of insurance cover over the next three to five years so that: Adult Australians have enough life insurance cover (either through superannuation and/or directly) to meet their personal liabilities and ensure the financial security of their families in the event of death; and Most Australians protect themselves against financial hardship caused by sickness, accident or injury.

Insurance is a key component of a properly structured financial plan. The proportion of the population with adequate life insurance is roughly the same as the proportion of the population that uses financial planners. This might be coincidence, but it might indicate that people who are serious enough about investment and wealth creation to use a financial planner also understand that adequate protection is integral to a comprehensive investment or wealth creation plan.

Insurance is critical to a financial plan for a very simple reason: if you die, or if you're unexpectedly unable to earn an income for a long time, your investment plan may collapse.

If you're uninsured or under-insured, you may have to draw down on your accumulated assets well ahead of time. And if your plan involves gearing (the use of debt), you may find yourself unable to service the debt and forced to abandon the plan altogether.

Even if you have no particular investment plan, you may have a large mortgage. Adequate insurance can make sure this financial obligation can be discharged in the event of your death or inability to earn an income.

In other words, adequate insurance cover is an effective means of ensuring that you or your loved ones can continue with your plans on your terms.

Richard Gilbert says the Investment and Financial Services Association's campaign is built on four basic propositions.

"The first proposition is that Australians are massively under-life-insured," he says.

"The second proposition is that we [the industry] have been in a state of slumberland in terms of addressing this issue.

"The third proposition is that primarily this is an industry problem, not a government problem.

"And the fourth proposition is that we can only fix this with a co-ordinated approach, which mainly comes from the industry but which will be helped by regulators and government."

In the past, life insurance companies had large and highly effective sales forces. They often had structural problems, and in some cases the remuneration of life insurance agents got out of hand, but they did a good job of getting the life companies' products to the masses. Today, the old-fashioned life insurance agent no longer really exists.

In addition, the life agents' traditional market has changed. More of us now have life insurance cover via our superannuation funds, but a false sense of security sometimes results, because for the typical super fund member the "default" level of life cover - the amount you get if you do not choose to acquire more - is not enough to cover his or her financial needs.

"The advent of the superannuation guarantee and default [life insurance] cover has massively cut into the market, but equally it needs to be said that the industry [superannuation] funds have done a great job in getting better cover, and in recent times have gone for deeper cover, to their credit," Gilbert says.

"Secondly, regulation has regulated life insurance out of the market, to some extent. But it has equally helped to protect people from 'excessive' sales practices."

Gilbert says he hopes life insurance does not get caught up in the debate about how financial planners and advisers should be paid, whether by product manufacturers or by their clients.

"There should not be a debate about commission on life insurance," he says. "It's the premium and the cover that are the critical things."

Gilbert acknowledges that the industry has to do more to help, including making products more flexible, accommodating and consumer-friendly.

He says insurers have to develop ways of selling insurance directly to consumers, as well as via intermediaries. Insurance needs to take into account a wider range of "ages and family genres".

"And the third point is to simplify it, and that's something that has still got a long way to go," he says.

"How does the average person know what 'morbidity' is, or 'mortality'? Or 'trauma'? The terms need to be more consumer-friendly.

"But another point about the industry is that for the first time ever, it has banded together, and that's critical to this campaign.

"The key message is that individuals do have this massive protection gap. But it's not hard to bridge that gap. There are simple ways and means to bridge the gap."

Gilbert says the sharemarket's woes and declining consumer confidence are not necessarily impediments to the campaign's effectiveness. On the contrary, it's often when times are tough or when there's a specific event to act as a trigger that people turn their attention to issues of wealth protection and protecting themselves and their families.

"Uncertainty and fear do mean that people start to look for safe havens," he says.

Gilbert is adamant that life insurance can be made simpler and more attractive without the industry seeking tax relief.

"We do not have any extant submissions in to government for tax relief, except for state stamp duty," he says. "Life insurance state stamp duty is, for customers' premiums, significant, but for the industry and for state revenue it's a nuisance tax."

Gilbert says his association would like to see consistent treatment for insurance bought within a superannuation fund (where there can be tax benefits) and insurance bought outside super. But the organisation is as keen for members of super funds to have adequate insurance through their fund as it is for them to buy additional cover (from its members) outside the fund.

If the campaign meets Gilbert's expectations, then in three to five years, life insurance will be viewed very differently from how it is viewed now.

Just as compulsory superannuation was neither understood nor widely supported when it was first introduced, Gilbert hopes insurance will move from "the Byzantine to having savvy, new-age status".

Gilbert says the association has realistic ambitions: "Even a 50 per cent increase in adequacy would be a massive achievement for the industry, and it would set a trend," he says. That trend would help encourage greater numbers to review their insurance arrangements and to obtain adequate cover where a gap was identified.

© 2008 Sydney Morning Herald

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