When it comes to life insurance, it’s not as straight forward as you might think. As with many things in life, you tend to get what you pay for. For some, Group Life insurance offers the benefit of providing some level of cover at a relatively cheap cost. But what are you forgoing for the cost saving?
A group insurance policy is one that covers multiple people (the ‘group’) at a discounted premium, given the overall size of the group.
You may have seen group life policies before, maybe without even realising it. Many industry and retail superannuation funds, bank provided insurance products (often coupled with lending products) and employer or union sponsored insurance policies fall into the group life category.
The benefit with these policies (other than the cost saving) may include:
- Premiums can be funded via superannuation contributions/balances or be subsidised by employers;
- The ease by which a policy can be established. Many times the insurer does not require an application, and may even offer cover over the phone;
- The cover is available to just about anyone, regardless of their medical history. In many cases, group life insurers will not request any (or limited) medical information.
Whilst establishing a group life insurance policy might be the easy part, it can become tricky when you go to claim (when it counts!). A few things to keep in mind:
- If the money is drawn from your superannuation fund, your balance will reduce by this amount.
- If your insurance was automatically given to you when you began with your employer, what happens to your policy if you leave your employer? Normally it is cancelled and you are placed at financial risk;
- It’s always important to read the fine print. When purchasing any insurance product, ask for the Product Disclosure Statement (PDS), and go through it with a fine tooth comb. Do you really know what’s covered and what’s not?
- When it comes to making a claim, group life policies are often underwritten (medically checked) at time of claim. This can result in extra stress when all you want to focus on is getting healthy again. That’s assuming the insurer accepts your previous medical history and pays a claim.
- Watch out for ‘pre-existing conditions’ clauses, which could result in a claim being denied.
The True Cost
For clients James and Melinda (names changed to protect identity), group life insurance has been a blessing and a curse. James had renal failure in 2001, and was lucky enough to receive a kidney transplant, allowing him the ability to return to work and lead a life much to the standard before his transplant.
Later on, the replaced kidney began to fail, and ultimately, James was diagnosed with end stage renal failure, meaning he is unable to return to work and is terminally ill. James approached our office to assist him in lodging his insurance claims. James had only a small balance in an industry super fund, with some Death and Total and Permanent Disablement (TPD) insurance attached. James and Melinda had a number of credit card, personal and vehicle loans, were renting and had very little cash savings. Melinda is unable to work as she needs to be James’s full time carer.
We lodged a claim for James’s industry super balance and associated group TPD insurance. Although the claim was successful, it took a long 5 months for James to receive the payment due to the communication lag between the industry super fund and the insurer. The payout allowed James and Melinda to pay off some of their smaller loans, as well as put a minimal amount aside for future medical and living needs. It was lucky for James and Melinda that Centrelink paid a disability support pension and carer’s allowance to maintain a very conservative living standard.
However, this did not stop the bills from piling up, and the debt collectors from knocking on their door.
In addition, back in 2009 James established a group insurance policy with his bank’s recommended insurer to pay out his car loan in the event of his death or inability to work. We lodged a claim on James’s behalf with the insurer, which was denied on the grounds of the disablement being a ‘pre-existing condition’ (from his kidney transplant in 2001). Essentially James had been sold an insurance product that would not pay based on his medical history, but he was not aware of this exclusion. After much escalation and back and forth, as well as the involvement of the Financial Ombudsman Service, it was found that there was nothing that could be done due to the terms of the insurance contract. However, due to the involvement of the external parties, a goodwill gesture was made to James, being a return of all of the premiums he had paid over time as well as a reduction to the outstanding loan amount owing, bringing his total bill to be paid to the bank in the vicinity of $16,000. Still a big payment for James and Melinda to foot, given they thought their insurance policy would cover them for this exact event.
As an alternative, comprehensive insurers will request full medical underwriting up-front. This might mean paying a little more for premiums, but you pay for the peace of mind that at claim time you know what you will be in receipt of, based on your own personal history. In addition, the policies are often far more comprehensive, providing a range of benefits not available through group life insurance. For more information on this type of cover, feel free to contact our office and arrange a time to discuss.
Teneale Laister AFP® BCom(Fin,FP,Mgt) ADFS(FP), is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
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