Policy switch on life insurance is long overdue

The recent agreement between the government and the life insurance industry to halve the maximum commissions payable to agents during the next three years is great news for many Australians. But coming as it has some 20 years after similar government action to reduce agents' superannuation commissions, many people who don't shop around have been paying much more for their life insurance than they need have.

Hopefully, the reduction in commissions payable will reduce the pressures put on customers to switch their insurance policy to another company for no sound reason. However, the opportunities for agents to encourage customers to change insurers will remain for the next three years, requiring people to be careful and examine agents' proposals closely.

The importance of agents and professional advice should nevertheless not be underestimated. Working out the type and extent of the coverage required can be difficult. Also financial pressures or a lack of concern results in many Australians being underinsured for death and disability risks.

While these risks are relatively low, especially at younger ages, the financial consequences of not being protected can be very serious. Unfortunately for most of the population, the days when employers provided generous death and disability coverage as part of their superannuation benefits are over.

Increasingly, with defined contribution or minimum employment superannuation guarantee contributions, employees are left to their own decisions to ensure they have adequate insurance protection. The difficulties are compounded when one partner in a couple does not work and is not covered by superannuation insurance protection. In this situation, the non-working partner has to consciously seek out coverage which would be needed, for example to protect the future of children in the event of a parent's death.

While it may not be possible for all families, arranging death and disability cover in a superannuation fund is more cost effective than coverage in personal names. The reason is simply that the costs are serviced by the contributions to or earnings of the super fund and are thus not a cash flow drain on the family budget.

Life and disability insurances taken out personally do not, unlike income protection insurance, attract a personal tax deduction, increasing the coverage costs compared with those in a superannuation fund.

The key message is that obtaining adequate insurance coverage is not solely a task of shopping around for the best deal but also one of investigating whether the required coverage can be obtained in existing superannuation policies.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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