Insurance: when tough choices need to be made

WHEN TIMES ARE tough and budgets are tight, it’s tempting to turn to insurance to cut costs. But the consequences of reducing your cover can be serious.

When Convid hit, some of insurance adviser Roy Agranat’s clients were caught in this dilemma. They wanted to drastically reducing expenses, including premiums for income protection, life and total and permanent disability insurance so they could pay their mortgage and other living costs. But they needed cover in case they died or suffered an illness.

“Everyone anticipated the worst,” says Agranat, who is a personal insurance and group benefits adviser at Fairbridge Financial Services. He was swamped by clients wanting to know what they should do.

If they cancelled their income protection, it was unlikely they would get the same benefits when they started another policy, particularly if their income fell, as the benefits are based on their pre-disability income.

Another issue is that if anyone was made redundant, and they were subsequently disabled due to injury or illness, they would generally be unable to rely on the income protection benefits embedded in their super fund and they would not be paid a benefit.

At the same time, people were angered by sharp rises in premiums for income protection policies. Due to the significant losses experienced by the insurers, some rates rose between 20% and 60%. Similarly, some clients also experienced premium increases on the cover held in super, partly as a result of two new government changes known as Protecting Your Super (PYS) and Putting Members’ Interests First (PMIF). These have changed the insurance status for many people and introduced complex new rules that require super funds to cancel insurance cover unless a contribution is received during a certain time period or the member has told the fund they wish to retain the cover.

“It was a perfect storm,” says Agranat, who counselled his clients to keep their income protection insurance but negotiate with insurance companies for some sort of reprieve. “They would never get their original income protection insurance back if they cancelled it,” he says.

But the insurers’ responses were all over the place. Some were terrible to deal with, refusing any sort of premium waiver, freeze of cover or temporary reduction.

Some insurers stepped up and offered people an ex gratia one-month premium waiver, a temporary reduction in premium and cover, a freeze on premiums, noting that they weren’t covered for that time. Some income protection policies include an “involuntary unemployment” three-month premium waiver, which they allowed clients to trigger even if they had not lost their jobs.

Some of Agranat’s older clients reviewed their insurance in the context of their retirement planning and decided to cut out their income protection early. A few wanted to increase their income protection and other covers as they were increasingly concerned about the health impact of Covid. Most wanted to consider decreasing their cover.

But the trouble is that insurance is a tricky financial product that can’t be judged only on price. Agranat warns that cheap insurance often doesn’t have the benefits that most people need. Comparing income protection and life insurance policies needs to be carefully done.