Navigating the world of life insurance can be challenging, especially with the myths and misconceptions that cloud public judgement. Understanding the reality behind these myths is crucial to making informed decisions about your financial security. Today, we’ll unravel four common misconceptions about life insurance in Australia: that level premiums equate to savings, that independent advisers are a real thing, that insurance companies don’t pay claims and that legacy products are always the best option.

 

Myth 1: Level (Variable) Premiums are a Guaranteed Premium Saving Strategy

One of the most common myths about life insurance is that level premiums automatically translate into long term savings. While it’s true that at face value a level premium policy offers the same base rate throughout its life, it’s important to remember that the insurer still reserves the right to increase this base rate whenever they see fit. Depending at what point in time this occurs, it can have a significant impact on your breakeven point. In recent times insurers have been heavily exercising this right, with up to 150% increases blowing a lot of policy holders strategies out the water and even resulting in a terminology change.

 

Now known as Variable premiums, there is a breakeven point of 22+ years for a new policy (assuming no rate increases during this time) which makes it more of a gamble than anything else. As a result this strategy has come under heavy scrutiny, particularly as it results in a higher commission rate for those who still recommend it and can therefore be deemed a conflict of interest.

 

Myth 2: Independent Advisers

The phrase “Independent Adviser” emerged at a time when many insurance companies were tied to financial institutions, and fund managers paying commissions on investments. These arrangements created potential conflicts of interest, as bank advisers and those affiliated with bank licensees could be deemed to promote their own products. As a result, advisers working independently of this system were distinguished as independent.

Over the years, the industry has evolved, with stricter regulations and educational requirements, as well as a heightened ethical responsibility to prioritise clients’ best interests. With banks divesting from ownership and the removal of investment commissions, the vertical integration models have been extinguished.

Today, what defines an adviser as independent, and what benefits does this present to clients? To use the title of independent, advisers must be self-licensed and earn no commissions, even on insurance products. For insurance products this can result in lower long-term costs for clients, however, the potential drawback is that these insurances are then overlooked, resulting in a lack of proactive engagement to ensure they continue to meet clients’ needs. Alternatively, clients might find themselves facing fees for every consultation.

While there are some subtle distinctions that certain clients might prefer, it’s important to recognise that the term “independent” largely serves as a marketing tool, and often results in higher fees for a perceived benefit. All advisers are required to adhere to the same professional standards, so make sure you aren’t paying in excess purely based on a catch phrase.

If you have questions about your current life insurance setup or want to explore options in light of recent changes, reach out to BFD Financial Planning today for personalised guidance and support. Your financial future deserves careful consideration, and we’re here to help you every step of the way.

 

Myth 3: Insurance Companies Don’t Pay Claims

Perhaps one of the most common myths is the belief that insurance companies don’t pay claims. This narrative often arises from media articles, isolated incidents and negative experiences, leading to a widespread generalisation about the industry. In reality, the vast majority of life insurance claims in Australia are paid. According to various industry reports, retail insurers pay a high percentage of claims – upwards of 90%, depending on the type of coverage and insurer. This percentage is higher when the claim is being handled by a financial adviser.

It’s crucial to remember that insurers have strict guidelines and conditions that must be met before a claim is approved. Many claims are declined due to a misunderstanding as to how the cover works – which is where dealing with an insurance specialist significantly mitigates the risk of getting any genuine claim being denied.

 

Myth 4: Legacy Products are Always the Best Option

One of the newer misconceptions following various policy changes over the past several years is that legacy products (typically older policies that are no longer being sold) are worth maintaining no matter the cost. While legacy products may have features that seem advantageous on paper, it’s important to understand how/if they are valuable to you specifically, based on your personal circumstances.

The insurance market is constantly evolving, offering new products with modern features, flexible terms, and in some cases significant premium savings. Therefore, it’s essential to assess individual needs rather than default to older products simply because they carry a reputation.

Conclusion

Understanding the truth behind these myths can empower you to make more educated choices regarding life insurance in Australia. Level premiums are not a one-size-fits-all savings strategy; so called independent advisers may be charging you more for no tangible benefit, insurance companies are generally more reliable than public perception may suggest and legacy products should still be reviewed to determine appropriateness. By debunking these myths and actively looking to engage an insurance specialists, you can approach life insurance with an informed perspective, ensuring that you protect your financial future with confidence.

If you have questions about your current life insurance requirements, reach out to BFD Financial Planning today for specialist guidance and support. Your financial future deserves careful consideration, and we’re here to help you every step of the way.

Contact us today. info@bfdfp.com

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The information contained on this website and in this blog-post is general in nature and does not take into account your personal situation or circumstance. It is recommended that you consider and use the information provided responsibly, and where appropriate, seek professional advice from a financial adviser.

Although, every effort has been made to verify the accuracy and correctness of information, BFD Financial Planning, together with our consultants, officers, agents, and employees, disclaim all liability for any loss or damage suffered by any persons directly or indirectly relying on this information.