What’s Behind the High Claims Decline Rates of Direct Life Insurance Policies?

The industry wide ASIC 498 report into life insurance claims outcomes unveiled the truth about how a customer’s choice of distribution channel (policy type) has a considerable bearing on the likelihood of their claim being accepted or declined.

The findings were staggering, compared to the Retail (Advised) distribution channel, Non Advised (Direct) distribution channels have a 71% higher chance of being declined and a Group policy a 14% increased chance of being declined.

Life Insurance Claims Statistics in Australia by Distribution Channel 2013 - 2015

Policy Types Declined Accepted in full Accepted in part Withdrawn Undetermined/Unspecified
12% 74% 1% 11% 3%
Retail 7% 76% 3% 12% 3%
Group 8% 77% 1% 9% 4%

Source: ASIC 498 Report

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Why do Direct Life Insurance policies have such a high decline rate?

There are a number of factors that are currently contributing to these poor consumer outcomes.

Firstly Direct policies are generally only fully underwritten at claim time which can often give customers the false sense of security that they are covered when actual fact they may not be. This is very different to “Retail” policies that are fully underwritten at application time which provides far more certainty at claim time.

Due to less underwriting happening during the application stage premiums for Direct policies can be up to 50% – 100%+ higher premiums than that of Retail life insurance policies, making these polices unaffordable in the long term which leads to people cancelling all their cover or parts of their cover when they are most likely to potentially claim.

Secondly inappropriate sales practices with most direct insurers policies having excessive exclusions built into their policies, it was found by the report that some customers would never be able to make a valid claim on their policy due to their personal circumstance or personal medical history at the time they took out the policy that would make them ineligible to claim on the policy.

Thirdly with these far reaching exclusions for pre-existing medical exclusions you may not actually realise but if for example you had high blood pressure at the time you took out the policy (even if it was controlled with medication) and you subsequently die some 5 years later from a heart attack your claim would be denied as the pre-existing exclusion often goes on to exclude related medical conditions “caused / related” to the pre-existing condition at the time you took out the policy.

How do I know if I have a Direct Life Insurance policy or understand what I am covered for?

The first step is to understand what are the exclusions built into the policy which you will find in the product disclosure statement (terms and conditions book) of the policy.
Here is an example of a policy you may want to consider avoiding:

No benefit is payable on Terminal Illness or death of the Life Insured if the cause is the direct or indirect result of:

  • A Pre-existing medical condition. Unless you, the life insured, can prove that you have been free of the condition for the five years following the cover commencement date, reinstatement or 5 years after you requested they increase your cover amount;
  • Suicide or an intentional self-injury during the first five years following the cover commencement date, reinstatement or any increase you applied for;
  • A Dangerous occupation or dangerous pastime at any time following your cover commencement date;
  • The life insured or policy owner’s participation in any criminal activity at any time following your cover commencement date;
  • A Known genetic condition at any time following your cover commencement date.

You may not be aware but all 5 of these points are inappropriate or excessive even the suicide clause! Generally a retail policy only has a 13 month suicide exclusion, compared to the above with a 5 year exclusion!

Secondly what is the premium today, in 5 years, 10 years, or 15 years + time? Can you afford it, are the premiums stepped (these are more expensive in the long term) or are they level premiums (Cheaper in the long term). How do these premiums compare to others and can you afford them for the duration you will need the cover for.

Thirdly what are you covered for exactly? ie: is it any type of death, or accidental death cover only. Are you covered for any other benefits such as critical illnesses, total and permanent disablement or sickness and accidents that prevent you from going to work e.g. income protection?

Fourthly (you will need to get this information from the consultant selling / providing the policy) is your application fully underwritten at the time you complete the application? This means that has the insurer asked all the questions they need to know about you (which you have answered 100% accurately), and that based on this information they are happy to insure me as they have a complete understanding of my medical and personal situation and that the insurer will not underwrite you again at claim time?

It is well known in the life insurance industry that Retail policies are by far the most affordable alternative, come with far fewer exclusions, come fully underwritten, are Guaranteed Renewable and have a number of built-in policy benefits, which benefit consumers and increase the likely hood of their claim being paid.

If you are looking for confidence in your life insurance policy we have put together 5 steps you can take to improve the likelihood of your claim being paid. However if you have any other questions that we have not covered off above please ask your question below or contact us on 1300 135 205.

Author: Russell Cain
Published: November 24, 2016

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