Consumers are at risk under the current life insurance system, the Association of Financial Advisers (AFA) has said in its submission to the Financial System Inquiry (FSI).
The direct sale of life insurance has become an increasing factor in the Australian market, however potential repercussions could mean some consumers only know if they are effectively covered after they claim, it said.
The AFA would like the inquiry – which is headed by former Commonwealth Bank boss David Murray – to consider the issue of consumer risk and protection where complex products are sold on the basis of general advice.
The COO of the AFA Phil Anderson told Wealth Professional
that he would much rather people get personal advice when acquiring products that are of a complex nature.
“Our past concern is the risk of clients purchasing life insurance products which are complex through direct means without access to advice,” he said. “We’re concerned that consumers stand to be disadvantaged, and to some extent it links into the issue of the distinction between general and personal advice.”
Another major risk consumers face is when they switch products and, as a result, lose vital benefits they didn’t really understand, the submission said.
“Where life insurance is sold via a direct channel, there should be additional obligations to address the circumstances where the product is replacing an existing product and the consumer has much greater need to understand the difference in terms of what the new product covers relative to the existing product,” it said.
Furthermore, a poor result at claim time due to this lack of product understanding could potentially reduce trust and public support of insurance in general.
The AFA submission also pointed to consumer research recently completed by the Financial Services Council (FSC) that uncovered a worryingly low level understanding of life insurance products and their features.
To combat the poor results, it would help if the government provided a tax incentive or disincentive like the current private health insurance arrangements, said John Brodgen, the CEO of the FSC.
“This would increase the uptake of life insurance and replace the need for public expenditure in the long term,” he said. “The research is clear – Australians don’t understand the benefits of taking out life insurance.”
Brogden added that given the almost $1.1 trillion death and disability underinsurance gap, it’s obvious that the industry needs to change the way it talks to Australians about life insurance.