The truth about over-the-phone life insurance

We’ve all seen the television ads – no medicals, no paperwork, low cost cover from one dollar a day and so on. Just call up and within minutes you can be accepted for up to $1m of cover. Sound familiar?

It’s no secret there are plenty of insurance providers playing in this space at the moment and consumers are responding in droves to their clever marketing campaigns. I say clever because on the whole, consumers think they can now get insurance that is the same as that offered by insurance advisers and financial planners by simply picking up the phone. This, however, could not be further from the truth.

The reality is, buying life insurance (and income protection insurance for that matter) over the phone is fraught with danger unless you understand and accept the conditions of the policy you are buying.

Sure, there are no medicals and paperwork required, but there is a reason for this – the policy is underwritten at claim time. What this means is your eligibility for the insurance is actually determined at the time you claim, not at the time you start paying the premium. In effect, what the insurance company is doing, is asking you to formally apply for the cover you have already been paying them for.

To illustrate, if claiming under an income protection policy, you will firstly need to complete an application form, personal statement and medical and occupational questionnaires. Then, the insurance company may request to see your medical records and put you through a series of medical tests. If, after all of this, they determine you are an ‘insurable risk’ for the policy you have taken out, your claim will be paid. If not, your claim will be rejected. The bottom line? You have no guarantee of insurance upfront.

Furthermore, the claims process often takes time, a number of weeks or even longer. This is important because if, for instance, you have claimed under an income protection policy, it will have been because you can’t work due to an illness or injury, so you’ll be going through the underwriting process at a difficult time and unless you have other financial resources to fall back on, you’ll be without income as well.

With respect to a life insurance claim, the insurer will firstly obtain all of the deceased’s medical records and where necessary, seek medical opinions from specialists and other medical experts. Again, this can take some time which is an important consideration. For example, if the deceased was the sole income earner, and the policy proceeds were needed to pay out the mortgage on the home and provide an income for family, timing becomes very important indeed.

After all enquiries have been made, the insurer will then determine whether the deceased would have been eligible for the policy and decide whether to pay the benefit to the beneficiaries (usually the surviving spouse and children). Additionally, pre-existing medical conditions are often excluded, so if you pass away as a result of a pre-existing condition your claim will usually be denied.

Moving onto cost, many consumers perceive insurance purchased over the phone to be cheaper than engaging an insurance broker or financial planner. Certainly, because of the shortcomings outlined above, this should be the case, but it isn’t. Because you are not underwritten upfront, the insurer has no idea how much risk they are taking on. This means they also have no idea how much they should charge you.

So what do they do?

They assume some applicants will be low risk (healthy) and others will be high risk (overweight with health issues). Low risk applicants are less likely to claim and are therefore a cheaper risk, and high risk applicants are more likely to claim and are therefore a more expensive risk. The insurers then balance this risk by calculating an average premium for everyone. This effectively means that the low risk people are paying a higher premium than the level of risk they represent, and the high risk people are paying a lower premium than the level of risk they represent.

Given this, high risk people are getting a good deal, right? Possibly, but think about this – which people are more likely to have a claim rejected once they have been underwritten?

Advice is the final issue to consider. The consultants you’ll speak to are not trained, and the company itself not licensed, to provide you with advice around what insurance policies and levels of cover you actually need. Additionally, they can only recommend one product, their own!

So what can we conclude from this?

Buying Life and Income Protection insurance over the phone is quite simply, not worth the risk. Afterall, you take out insurance because you want certainty, right?

These insurances play a crucial part in securing your financial future. Life and Income Protection insurance exist purely to eliminate any number of risks that you and your family could face if the unexpected happened. Because of this, it is vital you arrange these insurances in a way that provides as much certainly as possible.

To do this, you must engage an insurance expert. An expert will assess what insurances you need, the levels of cover required, the most suitable policy and insurance company to deal with and ensure you are underwritten upfront to provide certainty. And you’ll be paying a premium that reflects your level of risk.



This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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    Financial Planning Expert is an independent financial planning business based in Melbourne. We provide genuinely independent and conflict free financial advice. We’re experts in self-managed superannuation fund (SMSFs) advice and strategy, retirement planning, property and share investment advice, life and income protection insurance, tax planning, asset protection, estate planning and advice for Australian expatriates.