What You Need to Know When Buying Life Insurance Directly

Published: November 8, 2018

If you’re looking for a new life insurance policy, or perhaps just some additional coverage, you may be tempted to purchase a policy directly from one of the life insurance companies so frequently advertised on television and online.

However, if you’re set to buy a policy without the support of a broker, you might want first to compare a few quotes online or at least have a quick read of our guide below, which includes findings of ASIC’s 587 report regarding the sale of direct life insurance products in Australia.

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What is direct insurance?

Direct term life insurance generally refers to policies you buy directly from the insurer, either online, via a bank or over the phone, without personal advice and outside your super fund. It's up to you to search for and gather information about the insurer and their products. You complete the buying process at your own time without any advice or guidance from an insurance broker.

Buying directly from a life insurance company is an attractive option to many Australians, mainly because of the possibility of getting coverage without a medical examination and because it’s easy and convenient with less paperwork compared to advised policies.

The benefits of direct to consumer life insurance

  • You’re in control of the process from start to finish.
  • You can avoid dealing with insurance brokers.
  • The application process is generally quick and easy.
  • Usually, there are little to no medical information required when completing the application form.

While buying life cover directly from an insurer might save you time and effort, there are some definite disadvantages you have to consider.

The drawbacks of buying insurance directly

If you decide to purchase insurance directly, you are limited to the policies offered by the company, which might be more expensive than competing insurers in Australia. Different life insurance companies offer different rates because each company has their own underwriting guidelines and might view your lifestyle and health risks differently.

You’ll also generally have no real support during the application process. Let's say your policy isn't approved for whatever reason; you'll have to start your life insurance search all over again. If changes need to be made to your policy, you’ll have to rely on the insurer’s contact centre for assistance, and likely won't be able to speak with the same person twice.

Because little to no underwriting is usually done during the application process, your policy might include more exclusions to overcome selection risk and potential risks associated with your health, occupation and lifestyle. When it comes to the making a claim, you're on your own and must handle any disputes personally.

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ASIC life insurance review of products purchased directly in 2018

In 2016 the 498-report conducted by The Australian Securities and Investment Commission (ASIC) revealed that direct life insurance businesses in Australia had notoriously high claim rejection rates compared to retail insurance (cover sold through brokers). These findings lead to ASIC conducting further investigations (from 2017 to 2018) on how life insurance products in the direct channel are designed and sold, which lead to the publication of the detailed 587 report. Here’s what they found.

1. Direct life insurance is not cheap

Of the 8 direct life insurance firm's ASIC reviewed, the majority only offered a stepped premium structure, which means your policy may start cheaper, but increases every year as you age.

Stepped premiums might be an appropriate option if you’re looking for short-term coverage and have decreasing financial obligations, for example, your mortgage is nearly paid off. However, you might not be able to afford stepped premiums in the long run, and depending on your circumstances it might not be the best fit. Level premiums that are more expensive at the beginning but do not increase as you age might be a better option.

Another reason direct insurance might be more expensive is that of the heavily promoted add-on benefits, which might cost an additional fee. Do not be fooled by the person on the other line spouting congratulations on qualifying for a special offer, when in truth the added benefit might be of little to no value for you.

2. High cancellation and lapse rates

ASIC found that between 2012 to 2017 directly purchased life products had a very high percentage of being cancelled during the cooling-off period or lapsing within 3 years. A lapsed policy generally refers to a consumer actively cancelling their plan, or the policy cancelling automatically due to non-payment.

These high cancellation and lapse rates could be an indication that consumers purchasing life insurance directly from the company do not fully understand the exclusions on their policy or that their premiums had become too expensive.

3. Claims being declined

The ASIC report 587 found that life insurance bought directly had 15% of their claims declined, and 27% withdrawn (meaning the claimant actively withdrew their request or did not provide the required documentation to proceed).

Because direct policies generally have little to no underwriting at application time (fewer medical questions were asked), ASIC found that direct insurance firms generally provide inadequate explanations of exclusions for pre-existing medical conditions, which could be a contributing factor of claims being declined or withdrawn.

When buying life insurance, whether direct or through a broker, be sure to read the product disclosure statement (PDS) to ensure you know exactly what you are and aren’t covered for.

Questions to ask the life insurance company before buying direct

  • How long has the insurer been in business and who underwrites their policies?
  • How many people are currently insured with the company? This might indicate the size of the company and whether they’ll have the ability to pay out claims.
  • Who will assist you with the application process?
  • Whom can you contact if you have life insurance questions?
  • Are there online customer reviews about the company and where can you find them?
  • What extra benefits, like free child cover, does the company offer and can you remove benefits to lower your premium?
  • What does the company not cover? Direct insurers often have extensive exclusions.
  • What is the appeal process if a claim is denied?
  • Are the premiums you’ll pay stepped, level or hybrid?

Before buying life policies direct, you might want to review whether buying from a broker vs direct might be more beneficial to your budget and your loved ones should something happen to you.

Why you might need a broker

According to ASIC’s life insurance review of direct insurer’s, you might want to consider purchasing a policy through an insurance broker instead when you:

  • Want clear explanations regarding key exclusions and the possible future cost of your policy.
  • Need clarity about automatic indexation increases; it’s function and benefit and whether you can remove it.
  • Refuse to be pressured by cold calling or enticed by fancy advertising.
  • Want to shop around and compare policies from a variety of leading life insurance companies in Australia.
  • Require support and guidance regarding waiting periods and the claims process.
  • Need more information on the different cover types, the sum insured, and which policy might suit your specific requirements.

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