Changing face of insurance

Choosing a personal insurance policy is one of the most important investment decisions an individual will ever make. In the first of a four-part series, Gary Kleyn considers life insurance.

THE life insurance industry has been operating in Australia for more than 120 years, providing financial security for individuals and families.

In recent years, however, the financial services industry has undergone deregulation and the barriers separating life insurance firms from other financial products have been eroded.

Life insurance typically includes disability or trauma insurance, but increasingly it is being viewed as a superannuation product.

It is estimated that close to 6,500,000 Australians are protected by life, disability and trauma policies.

The Australian Prudential Regulation Authority, which administers the industry, says that in June 2002 there were 42 life insurance companies operating in Australia, managing assets or around $188 billion.

In the year to June 30 2002 the life insurance companies received $38.1 billion in premium income.

Life insurance business can be divided into two distinct sectors – superannuation business and ordinary business, where superannuation now makes up 86 per cent of all life office assets and 89 per cent of premiums.

The Investment and Financial Services Association Limited, which is the national not-for-profit organisation representing the life insurance industry, has produced a fact sheet outlining some of the benefits of being covered by life insurance.

“Australians purchase life insurance because it provides an affordable way of collectively sharing risks that are too great for them to bear as individuals,” the fact sheet says.

“Each of these risks, if not covered by some form of insurance, could cause severe financial hardship, the depletion of savings, and ultimately reliance on the government’s social security safety net.”

But how does life insurance work?

Life insurance is voluntary in Australia and is a contract that sets out the responsibilities of both the life insurance company and the person who is taking out the life insurance.

“Under the law it is the duty of the life insurance company to give potential customers all necessary details about the products” the fact sheet says.

“In turn, it is your responsibility to provide the life insurer with all information about you that may affect the risk you are asking them to accept.”

All premiums are paid into a ‘risk-sharing’ pool while the policyholder is protected under the Insurance Contracts Act 1984.

The level of premium to be paid by the policy holder is determined by the risk factors of the individual concerned. But the IFSA says that, in Australia, approximately 93 per cent of all applicants for life insurance obtain policies at standard prices while just 2 per cent are refused cover because of extremely hazardous jobs, ill health or other high-risk factors.

“Unlike car or house insurance, once a life insurance policy has been issued, the insurance company cannot cancel or in-crease the price because of deterioration in your health,” IFSA says.

“Remember, life insurance is very competitive, so it is advisable for consumers to shop around for the best price. If one company declines to offer you insurance, another company may be willing to grant cover.”

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