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Direct Life Insurance | All You Need to Know & More!

Direct insurance offers many perceived benefits, including ease of application, quick acceptance, low cost and the opportunity for customers to “self service” by conducting their own insurance research. These benefits are resonating with customers as shown by the rapid growth of this product range – the number of direct life insurance products has increased from 109 in 2008 to 203 today, an increase of 86% in the last 4 years. Sales in 2011 alone were $279.2 million (Rice Warner Actuaries, Direct Life Insurance Report 2012, page 5).
This article will focus on direct insurance policies and the “tips and traps” of these plans including:

  • What is direct life insurance and what are the different types of policies offered?
  • What are the advantages of direct insurance policies?
  • What are the limitations of direct insurance policies?

How do they compare to an insurance policy offered by an adviser?
What is direct insurance and what are the different types of policies offered?
Direct life insurance products are defined in this article as those products designed to be purchased directly – without using the services of an intermediary or an adviser. There is also likely to be no face –to-face interaction between the customer and a representative of the distributor or insurer.
The sales process for direct insurance policies is typically initiated trough a variety of means:

  • Over the telephone (inbound or outbound calls)
  • Online via websites
  • Direct mail to customers
  • Advertisements in televisions, newspapers, magazines or radio
  • Available directly through bank branches

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There are a number of different products available:

Advantages of direct insurance policies are:
No, or limited, underwriting: Rather than spend time collecting medical information from customers and assessing their individual health risks, direct insurance policies rely on a number of different techniques to minimise claims risks, to ensure they insure healthy people and that cover is offered without the burden of medical assessments. These techniques include:

  • the use of automated underwriting;
  • the design of products with exclusions to overcome selection risks and risks associated with health, occupation and pastimes;o
  • limiting the maximum sum insured (eg in funeral covers and trauma products); and
  • carefully selecting the customers to whom products are marketed.
  • The result is that if you are a healthy person, direct insurance on the face of it can appear to be a good way to get cover quickly.

Simplicity:

The insured is provided with a level of cover without completing any health forms or engaging with a financial adviser. The products are simpler in design with shorter PDS’s. Customers can research their own choice of insurance products, at least in relation to price.
Limitations of direct insurance policies are:

 

  • Basic: The benefit usually contains no “bells and whistles” in terms of product features, as there is no adviser to explain them, and cover is often quite limited due to the limited, or no, underwriting. The definitions and terms of the product are usually not as extensive or favourable when compared to retail insurance policies sold with financial advice.
  • Cost: Direct insurance products, while marketed as being affordable, can be up to 184% higher in price than retail advised products, and up to 667% more expensive than insurance in superannuation funds (Rice Warner Actuaries, Direct Life Insurance Report 2012, page 5). Insurance aggregators (eg iSelect, Lifebroker, InsuranceWatch) may over time put downward pressure on these prices, as more insurers develop direct life products specifically for the aggregator market (currently most insurance products on these sites are advised intermediary products).
  • Underinsurance: As no financial advice has been sought, and as sums insured are usually lower, the cover may be insufficient to meet the needs of the client in the event of death. Most direct insurance providers provide advice under a General Advice license, which means it is not tailored to the clients own individual needs and circumstances.
  • Claims: Customers must contact the broker or insurer direct to manage their claim. This can be a complex process at a time when the insured is unwell, and it is also dependant on the insured knowing what they are covered for and that they are eligible for a claim. With an advised product, the adviser can assist in managing the claims process with the insurer.
  • Exclusions: Direct insurance policies generally have more exclusions than advised products. These additional exclusions may include AIDS, hazardous or professional sports, drug and alcohol related claims, criminal activity, riots/terrorism/war or pre-existing conditions.
  • Decline/Referral/Loading process: If a client does have health issues at the time of application, then the request for cover will be declined, referred (where the insurer will contact the client and ask more questions) or, in some cases, loadings can be offered. These offers of alternative terms can be confusing to navigate without an adviser. It may cause customers to not proceed with the insurance at all, and leave them underinsured.

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Handy Hint
It is important to review the policy paperwork received from the direct insurer to ensure that you are aware of the terms of the cover being offered. Be mindful of:

  • Exclusions
  • Pre-existing conditions clauses
  • Cost of the insurance
  • Extra loadings/exclusions/declines if you have health conditions

How does the insurance within a direct insurance policy compare with cover offered by an adviser?
The products offered by direct insurers are generally basic relative to other advised insurance on the market; however they do provide customers with simple cover with an easier application process for those that are healthy.
It is important to consider that, when compared to direct insurance policies, retail products offered by financial advisers:

  • are typically far more comprehensive,
  • are often cheaper,
  • have more favourable definitions,
  • offer more guaranteed cover; and
  • allow advisers to assist in managing the claim process.

The definitions and features with a policy offered by advisers are of higher quality with less exclusions providing a greater security and opportunity to claim. Furthermore, the level of cover recommended by an adviser will more likely meet your long term needs as it is tailored to your own individual circumstances.
Importantly, being underwritten at the time of application also provides a level of certainty of what you are covered for should a claim event occur.
For those customers concerned about adviser fees, it’s important to note that, while direct insurance does not involve payments to advisers, many are sold via distribution arrangements that involve the payment of commissions to the distributor or administrator of the product (Rice Warner Actuaries,, Direct Life Insurance Report 2012, page 11). This, coupled with high marketing costs and the risks of not individually underwriting each customer, is why direct insurance is often not cheaper than advised insurance products.
Conclusion
To ensure you are adequately protected with a quality product, it is important to review your existing insurance arrangements and determine whether these levels are sufficient to meet your long term needs, with the most appropriate features and benefits based on your personal circumstances. To discuss your own personal circumstances, please contact our office.