7 Mistakes people make when buying insurance

When people buy insurance the “simple way” (from TV advertising), using robo advice or simply hoping their super funds provides what they want, they can make critical mistakes in the purchasing process. Firstly they need to know exactly what the products are and what they do in the case of a claim.

Life insurance provides the capital at death for things like mortgage redemption, capital funds for education, lifestyle requirements for your family and income for the survivor.

Trauma cover provides capital in the event of specific illness, accidents or events. This part of your protection planning pays out to the living.

Income protection provides a regular income as a percentage of your earnings for a specific time. This product pays out to the living.

Your employers super fund may or may not provide these things. The government's contribution through pensions is being critically looked at. Superannuation funds generally only provide a percentage of the real sums needed for adequate insurance cover.

If there isn't going to be enough money to do those things that need to be done, then you definitely need to have an insurance protection package. Like all essential purchases there are some hard decisions to make that you need to consider.

1. Buying insurance online without good professional advice

Generally when you buy insurance over the phone the assessment process is seen to be simpler! Be wary. This type of cover can mean assessment is carried out at the time of claim, not at the time of application.

By accessing cover with an adviser you are assessed at application time. This means you and your family have some certainty when you are accepted at application rather than be declined payment because of non-disclosure, exclusions or unfair clauses in inferior products at some time in the future when you are at your lowest mental state

Advisers give qualified advice backed up with a defining document called a statement of advice demanded by law. So taking 15 minutes to buy cheap online products can be very expensive if the provider doesn't pay at claims time.

2. Thinking your covers are best handled in your superannuation fund

Yes your industry superannuation fund may have a component of insurance included. Generally it is a minimal amount of protection to a certain age with sometimes blurred definitions for payment. Claims payments generally need to be approved by the trustees of the fund. This can often take months.

Whereas good advisers will confirm not only are they involved in the sales process at application time but also in the claims process. That is important.

Some questions you might like to ask your industry super fund adviser or the trustees of the fund are: 

• What support do they give in settling claims?
• What are the qualifications of the trustees of the fund to settle claims?
• Does the fund settle claims or is that function outsourced?
• How quickly do they settle claims?
• Does it cost anything to get claims paid?
• What professional standards do their people have in ascertaining how much cover I should have at application time?
• Does my cover reduce after a certain age?
• At claims time do I have to get my solicitor/accountant involved in the claims process (which costs extra)?
• Do they give any guidance on the nomination of beneficiary aspects of the cover?
• Will my beneficiaries have to go direct to the insurer to gain access to my benefits?

By all means accept the generosity of your employers nominated fund, but cover the gaps with your own personal portable protection package. This is sound financial management.

3. Only considering price rather than value of the product(s) purchased

Price can play an important part in your decision to buy a protection package, but it is not the only thing to consider. Consider things like:

• The capacity of the insurer to pay
• What type of benefits are included
• How tight are the definitions of the policies
• Disclosure of the obligations of the seller
• Dispute handling processes
• Claims payment capabilities
• What exclusions or limits exist on the cover
• Educational resources if laws or obligations change
• Regular reviews by a competent adviser
• The correct nomination of beneficiary advice

Price should be a balance for quality, service and communication. Without professional advice you may be receiving inferior service that eventually costs you a lot more than what you think you have saved.

4. Buying insurance with premiums that increase as you get older

As you get older the risk factor for insurers gets higher. So buyers face higher premiums. This causes many people to let their protection packages lapse. Did you know you can buy life insurance with level premiums? This means the premium can be averaged over the lifetime of the policy. So if you are young and looking to keep your policy for some time, have a look at this level premium option. Ask your adviser about the benefits and advantages of such a facility. 

5. Skimping on the amount of coverage you and your family really need

Often people are not aware of the amount of cover they require. This is often predicated because they want to save money on premiums so they reduce the amount of cover they really need. One way to ascertain what people want is to ask a series of questions such as:

If you were to die prematurely which option would you prefer for your partner?

a) They could own the house you live in and never have to work again

b) They could keep the house you live and not have to work for 10 years

c) They could keep the house you live but have to go back to work in say 6 months

d) They lost the house and had to go back to work immediately

e) They can fend for themselves

Try a variation of these questions on the different ages of your potential and existing clients. Cover offers in industry super funds are rarely canvassed on these critically important questions.

6. Not considering the methods of distributing the proceeds of the policy after your demise

Depending on your circumstances you need to be aware of the range of ownership options that affect the speed of distribution of funds from life insurance and protection packages.

Ask you adviser about the following methods of ownership and how the funds are distributed at claims time.

• Owned solely by you on your life and mentioned in a will
• Owned solely by you on your life and not mentioned in a will
• Owned solely by you on your life and left in trust
• Owned by your spouse/partner on your life
• Owned jointly by you and your spouse/partner on your life
• Nomination of beneficiary options under life cover in superannuation funds
• Insurance under Buy/Sell corporate situations

This is where a competent adviser can show you the options best suited to your situation that can get the right amount of money into the right hands in the quickest time.

7. Failing to review your situation and your covers as life events take place

Event changes can be monumental or minuscule. They can range from the birth of a baby to adding a new room to the house; finally going on that south seas cruise to paying off the mortgage or achieving a promotion or re-entering the work force.

Every time you achieve a significant milestone in your life you need to have a re-calibration of your protection package. Have a talk to your adviser. Maybe they can save you some money, get you better value for your dollar invested, open your eyes to the real needs of your family if you are no longer here or show you valuable new product innovations you may not be aware of. 

This article is reprinted with permission from Jim Prigg CEO and founder of Knowledgemaster International (KMI) Pty Ltd. KMI is an online resources company that delivers practical communications, interaction, sales and soft skills tips, tactics, techniques THAT WORK.

Learn more about winning business programs by calling Jim at mobile 0408 520 453 or [email protected].

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