Most Australians have life insurance, whether they know it or not, since most superannuation funds offer default levels of life cover for all members. What’s wrong with this picture is that Australians still have no idea what their money is buying them (or could buy them), CoreData research shows.
CoreData's latest insurance research follows on from the 2014 report Australians, mis-informed, mis-insured? that sought to really understand where Australians were at with insurance. Not much seems to have changed.
The Financial Planning Association (FPA) and Zurich Financial Services have published the Life Insurance Literacy Gap report, finding – not unsurprisingly – that there is still a large gap in consumer understanding of life insurance, leaving a lot of room for advisers to step in and educate clients to improve the perception of value - an ongoing process.
The research piece works off the CoreData-constructed Insurance Literacy Index which uses knowledge and behavioural indicators. A startling key finding was that almost half of all Australians ranked as ‘poor’ in the Index; that is, a score of between one and four out of a maximum of 10.
Consumers were asked to rank themselves on their own life insurance literacy, with two-fifths qualifying themselves as being of average knowledge, with a fifth admitting they have poor, or very poor, comprehension of life insurance. This shows there is also a gap between what consumers think they know, and what they actually know.
Key findings include:
- Many Australians (17 per cent) do not know if they have trauma cover.
- Almost 40 per cent did not know that being diagnosed with a terminal illness is a trigger for a life insurance payout.
- Less than 10 per cent said they ‘went with their gut feeling’ when choosing how much cover to purchase.
- Over 40 per cent said they weren’t sure if they could buy travel insurance through their superannuation, with 8 per cent believing they could buy this type of insurance through their super.
- Nearly 57 per cent didn’t know if term life insurance purchased via their superannuation fund was tax deductible, or if term life insurance bought outside of superannuation is tax deductible.
- The average financial literacy score for consumers who sought advice was ‘excellent’, with an average score of 6.7 out of 10.
Providing holistic advice
Part of providing comprehensive financial advice is educating clients about their options, including risk insurance. This research examines the extent to which advisers are educating clients and improving insurance literacy, with positive outcomes in this area.
The Insurance Literacy Index is expected to become a benchmark from which to launch initiatives of all levels to improve insurance literacy. Financial advice, while suffering from poor reputation, now has more hard evidence of the benefits of advice, which contributes to the growing body of research that proves beyond doubt that financial advice is worthwhile.
The ‘advised’ and the ‘unadvised’ are quite separate groups from which to learn from in terms of life insurance literacy, which the research report capitalises on, splitting these two groups to prove at least some parts of the point.
The differences between advised and unadvised clients was clear from the data: 61 per cent of those who were advised on life insurance had ‘excellent’ levels of insurance literacy, while only 24 per cent of the unadvised demonstrated same. Additionally, 26 per cent of advised clients had ‘poor’ insurance literacy, but 56 per cent of the unadvised were in this category.
So what do advised clients know that unadvised don't?
The information that advised clients had that unadvised clients didn’t related to their own levels of individual cover, how much this cover costed them, tax relating to insurance, and what events would trigger a payout.
Advised clients are more likely to not only actually hold insurance, but due to this, have had an insurance event in the past that results in experiences the unadvised don’t have as much of. This improves knowledge. Over a third of the advised Australians surveyed rated their insurance knowledge and experience as ‘strong’ or ‘very strong’ compared to just 15 per cent of unadvised respondents.
The advised clients are more likely to understand their own cover, including how much they are insured for and how much this cover costs them every month, with a gap of about 20 per cent for both factors.
The tax treatment of life insurance inside of and outside of superannuation isn’t a commonly known or understood element of insurance, but advised consumers know more: 63 per cent of unadvised aren’t sure about tax treatment of risk insurance, compared to 42 per cent of advised consumers.
When it came to trigger events for a payout, advised Australians are better informed. Nearly 25 per cent of unadvised consumers don’t know what term life insurance actually covers, but just over 10 per cent of advised clients didn’t know. Having someone to ask or explain this clearly can make all the difference.
Knowing precisely what was available to them via superannuation was another area with significant differences in knowledge: the advised know (80 and 50 per cent of the time respectively) that life and TPD can be bought through super without any upfront expenses. This is compared to 63 and 42 per cent knowing about this respectively for the unadvised.
What insurance is best?
When it came to what products Australians believe are best suited to various situations, the following was found:
- Respondents generally believed that income protection insurance would best take care of financial burdens (23 per cent), but in the case of a serious accident or illness resulting in death, term life was thought to be the most appropriate cover (56 per cent).
- When quizzed on life and income protection alternatives, just over one third (35 per cent) said there were no effective substitutes for life cover, and 31 per cent said there were no effective substitutes for income protection insurance. This leaves a significant number of people believing there are other sufficient alternatives to life insurance available to them.
- Almost 42 per cent of all advised respondents say there are no effective substitutes for life insurance, while 32 per cent of unadvised respondents said the same.
- Risk management mechanisms (Workcover, Centrelink, NDIS and health insurance) were mistaken for life insurance substitutes less often by advised consumers than unadvised.
- About 60 per cent of all adult Australians have some type of life insurance, with two-thirds buying it via superannuation, 52 per cent taking it out without help from an adviser, and 11 per cent using an adviser’s help.
- Advised respondents (77 per cent) are more likely to have insurance than the unadvised (52 per cent), with the unadvised with insurance twice as likely to have just the default level of cover set by their superannuation fund.
Other insurance types available through superannuation
There is a small – but alarming – number of people who believe one is able to buy travel, contents, car and other types of unrelated insurances via their superannuation, but the overriding results of these specific questions was that people just weren’t sure if these different types of insurance were actually available. These numbers show the true confusion that consumers are engulfed in when it comes to insurance.
It is startling that almost 40 per cent of those 800+ respondents do not know if they can get comprehensive car insurance through their superannuation.
The only thing most respondents did know was that their family could get a payout from insurance obtained via superannuation in the event of their death, but still, 27 per cent did not know if this was true.
Direct cover vs. advised cover
The main reason people didn’t want advised cover is that they thought it was cheaper to avoid adviser fees and commissions, which in fact is not largely true. Other factors included getting cover quickly and keeping it simple with online applications and approvals.
The survey covered over 800 Australians and a range of financial advice and insurance topics in late 2014. About 260 of the respondents had a financial planner and received specific life insurance advice.
What this research ultimately tells us is that Australians are still very much in the dark about what they can and can’t do with insurance, particularly when it is obtained through superannuation without any upfront costs to them directly.