The PFL Loan Protection Insurance Report 2016 is an independent investigation into mortgage and personal loan protection insurance products, part of the Australian consumer credit insurance market.
The Report explores key underlying aspects of the following areas:
- Market overview of Australia’s household debt.
- Loan protection products, feature analysis.
- Premium comparison analysis.
- Product Benchmarking, with the evaluation of 40 products offered by 82 sellers and underwritten by 17 issuer partner groups.
Loan Protection Insurance
Loan payments are generally the largest household monthly expenditure and a loan’s repayment being one of the largest household obligations. Consequently, the financial impact of unemployment, disability, trauma or death on a household can be significant. Loan Protection Insurance seeks to reduce this risk.
The insurance is often purchased at the time of entering into the loan and is frequently arranged simultaneously with the loan. While not a precondition to the loan's approval, some sellers have come under criticism for failing to point out that the insurance offered is not a precondition of a loan's approval.
Products are generally structured to offer purchasers a choice of benefits matching their needs and the underlying loan i.e. personal or mortgage loans. The types being:
- Loan Cover offering Life and/or Trauma benefits covering a loan’s repayment;
- Repayment Cover offering Disability and/or Involuntary Unemployment benefits covering periodic repayments; or
- Both offering cover for periodic repayments and outstanding loan balance.
The characteristics of Loan Protection specific benefits in terms of their definitions and exclusions are generally in line with life, trauma, critical illness and income protection products. The term is usually linked to the duration of the underlying loan with some policy term limited to a specific period.
The distribution channels include:
- The point of arranging the loan, either directly with the Bank or Mortgage Broker;
- Directly through the distributors via a web site or call centre; and
- Directly with the distributor or insurance agent.
In comparison to the direct life insurance market, the use of issuer white label products is much more prevalent. Of the 40 policies evaluated, the distributor / seller branding ranged from full branding on the Issuers PDS, a branded wrap around page, a logo appearing on the cover page to no branding at all.
The Consumer Action Law Centre has recommended changes to selling practices for Loan Protection Insurance. Like those implemented in the United Kingdom, it is recommended a delineation in both time and process be implemented to clearly separate in the consumer’s mind the loan application process from the offer of insurance.
With recent bad press around the selling practices of Loan Protection products and on-going concerns regarding financial advice, a number of companies have removed their Loan Protection products from the market or are currently holding off actively promoting these products for the time being.
While the loan market is dominated by the four major banks, a segregation of the loan approval process from the purchase of Loan Protection Insurance may produce some opportunities to grow market share via mortgage brokers or the direct channel.
Over the past 40 years Australia has seen strong economic growth underpinned by a growing population and a series of major reforms. This has also seen growth in Australia’s overall level of debt for housing, both owner occupied and investment. As at February 2016 the total residential term loan market was $1.4 trillion of which 64% was for owner occupied loans and 36% for investment loans.
It is anticipated that Australia’s level of household debt will continue to increase, reflecting a combination of population demand for housing, historically low interest rates and significant house price growth. Consequently, Australia’s households are increasingly required to manage the risks associated with the repayment of debt.
The Plan for Life evaluation methodology compares selected Australian loan protection insurance products against specific criteria and then compares those products and their pricing against each other. Plan for Life reviewed 40 Loan Protection Insurance products offered by 82 sellers and supported by 17 issuer partner groups.