Life insurance with super vs direct vs via broker
In Australia, there are currently three main ways life insurance is distributed:
This popular ‘DIY’ approach lets you research and compare all the life insurance policies yourself. This means you need to take the time to understand exactly what you are getting and be able to compare every policy on the market.
2. Financial Advisor/Broker
Also known as retail. You call in the help of a financial professional to find the policy that best suits your unique needs and lifestyle.
Also known as group insurance, your superannuation fund may offer some level of cover.
Distribution channels for Life Insurance in Australia1
Want to learn more about all three options? Here’s a breakdown of everything you need to know when choosing life insurance.
2. Financial advisor/broker-assisted life insurance
A large number of life insurance policies for sale in Australia are only available through advisers or brokers and there are a number of reasons for this.
(For clarity and consistency, the term broker will be used to indicate a professional who is either a financial advisor or an insurance broker who acts on behalf of a customer to provide personal advice to them about purchasing insurance.)
By distributing through brokers, life insurers can sell more complex products, with the expectation that a broker will take the time to educate their customer and ensure that the cover is suitable for them. There are often a lot more options on these products which allow brokers to specify which set of options are appropriate for their customers, which they do through the advice process.
While the cost of cover through brokers or direct is comparable, it is generally a much longer process to obtain cover through a broker. That is because they need to undertake a full advice process and they will issue you a statement of advice, which is a legally required document that sets out the advice they are providing for you. The nature of the advice can be range from limited advice that is specific to the type of insurance policy you are interested in, all the way up to a complete financial plan. It’s important to be clear with your broker at the beginning about what kind of advice you are after so that you don’t end up paying for services that you never intended to acquire.
This is probably a good time to discuss the difference between an insurance agent and an insurance broker.
Should I use a broker?
Ultimately the decision comes down to a few key questions. Ask yourself the following:
- Do you understand key concepts about insurance? Or do you need a broker to help you understand?
- Do you have a good idea about the types of cover you need? Or do you need a broker to assist you to identify your requirements?
- Are you happy to deal directly with the insurer for your insurance needs? Or do you want to have a broker deal with them on your behalf?
- Are you comfortable to make financial decisions for yourself based on information provided to you by an insurer? Or do you want some personal advice to assist you?
- Are you willing to pay for the services of a broker?
5 most common mistakes to avoid
1. Not doing your research
Don’t settle for the first policy you come across. Do your research until you find the policy that best suits your unique needs. Consider your life stage, any major life events, your family size and requirements, and the premium structure of the policy.5
2. Choosing cost over policy value
Focusing only on the cost undermines the real value of any insurance policy, but especially life insurance.6 Remember the main reason you are setting it up – to protect your family’s financial future.
3. Not reading the PDS
It’s important to read your PDS all the way through to ensure you know exactly what you are and aren’t covered for.7
4. Waiting too long to buy
Life insurance is generally not available after you are diagnosed with serious conditions, or where it is available it is likely to be very expensive and have significant exclusions that undermine the benefit of it. Life insurance is designed as a risk management tool, and you should consider purchasing it where you identify that you or your family would be at significant financial risk if you were to die. Often this risk is at its greatest when you are young and in the peak of your work-life. As you get older and your financial assets grow, you may no longer have as much need for it. But so long as you are below the maximum age, you can take up a life insurance policy at any time.
5. Not covering a non-working partner
Are you or your partner a homemaker or stay-at-home parent? Have you ever sat down and crunched the numbers to determine exactly how much that is worth? Although you or your partner doesn’t get paid a wage, you ought to consider how these tasks will be completed and whether you need to factor in the costs of paying someone else to do those jobs in the event of your death, serious illness or injury, or total and permanent disability.8
4 life insurance myths busted
1 Life Insurance claims: An industry review - ASIC
2 Why buy Life Insurance direct from an Insurer? - Real Insurance
3 Real Insurance Family Protection Survey 2017 – Real Insurance
4 How to Buy Life Insurance – Canstar
5 Seven Big Mistakes To Avoid When Purchasing Life Insurance- Forbes
6 5 Mistakes to Avoid When Buying Life Insurance - Smart Asset
7 Common mistakes to avoid when buying Life Insurance direct - Real Insurance
8 6 Common Mistakes to Avoid When Buying Life Insurance - LeverageRx
9 Superannuation Life Insurance - Finder
10 Life Insurance claims: An industry review - ASIC (finding #167)