Long-time senior industry advocate, Don Trapnell, has released an open letter in which he argues the recent creation by one insurer of a new risk cover class for life insurance policies opens the door to a precedent that he says should worry anyone relying on life insurance to deliver on its promise…
If you missed it, Zurich has created a new ‘death cover class’. This new class includes policies where a third party has a legal or beneficial interest, such as co-ownership arrangements involving a financial services business. Those policies will face what Zurich calls a ‘substantial’ premium increase – up to 400%.
In other words, the insurer is re-categorising a group of policyholders based on how their premiums are paid and who ultimately benefits from the policy.
It raises a fundamental question: How is it acceptable for an insurer to re-categorise any particular group of its own policyholders for any reason and effectively change the deal after the fact?
This creates a situation where, as long as you can prove you can afford to pay the premiums yourself, everything remains the same, but where a third party is involved and has a financial interest, the premium may substantially increase. Once that door is open, where will it stop?
What if another insurer decides to create a new risk class to include policyholders who assign their policies to family members? What if a son or daughter helping to pay premiums is suddenly required to pay four times the premium because they have a beneficial interest in the policy?
What if it goes even further? What if it extends to people living in certain suburbs of Melbourne or Sydney or Brisbane based on perceived claims experiences?
A new death cover class sets a precedent that has the capacity to erode consumer trust – in insurers, in the industry, and in life insurance itself.
It also places advisers in a very difficult position, having recommended policies under one set of terms that can be substantially altered by the product manufacturer later.
This affects service providers such as iExtend. That’s significant. iExtend offers a structure designed to help people manage rising premiums. It contributes to the cost in return for a share of the death benefit. It’s worth remembering that iExtend earns nothing unless a claim is paid, sometimes many years later.
I have personal experience with this structure myself, as did one of my clients.
Graham* rang me one day to say he wanted to cancel his life insurance, the premiums were eating up too much of his income. My response was simple: “Graham, with your health history, that would not be a very smart thing to do.” He had already had a heart attack and triple bypass surgery.
Financial pressure
But he was under real financial pressure and looking to cut his expenses. Instead of arguing with him, I went searching for a way to help him keep the cover in place without breaking his budget. Then I sent him an email setting out how the iExtend structure worked.
Graham came back to me saying: “If someone else believes this policy is valuable enough to pay towards, perhaps I should treat it as valuable too.”
About 18 months later, Graham went in for what was meant to be routine surgery. During the operation he developed a blood clot and never came off the table.
When his wife came to see us, she was not only grieving, she was shocked. She had discovered that the beautiful home they had been living in and the nice car they drove were leased, not owned. In fact, the only meaningful asset left to her was the life insurance policy.
Because of the way we’d structured the policy, 50% was owned by Graham and 50% by iExtend. She received 100% of Graham’s 50% and because Graham had died within four years of putting the arrangement in place, a significant portion of the remaining 50%.
These benefits enabled her to buy a small home of her own and set aside some savings so she could live with dignity for the rest of her life, rather than relying entirely on her children and Government support.
Had that insurance not been in place, had iExtend not existed as an option, she would have been left in a truly precarious position. Instead, the policy did exactly what life insurance is meant to do: protected an ordinary Australian in her most vulnerable moment.
Life Insurance Act
Insurers have some powers under the Life Insurance Act to adjust product terms across their books in certain circumstances. What’s at issue here is something that arguably goes beyond that. An insurer appears to have applied different terms to a very specific group of policyholders retrospectively.
If an insurer wants to change its appetite or product design going forward, that’s their prerogative. Update the policy wording for new business. Make the terms clear. Don’t reach back into an existing pool of long‑standing policies and change how they operate for a targeted group of policyholders.
Life insurance must be allowed to keep its promise. At its best, it does something profoundly simple and profoundly important: it catches people when the worst happens. Graham’s widow living modestly but securely, is evidence of that.
If insurers are allowed to substantially rewrite the deal for specific groups of people after years of premiums have been paid, it will erode the very foundation that makes these products work: the belief that, when you most need your policy to stand up, it will.
*Name changed to protect privacy.
Don Trapnell is a former Chairman of Synchron Advice.
When I first heard this news, I was appalled. How could an insurer effectively change the terms of the policy willy-nilly. It reminded me of the sort of rubbish that was around when I joined this industry, when AMP had an income protection policy that limited payouts to the policyholder funds held in a particular separate statutory fund i.e. a life policy that was not covered by the Statutory Number 1 Fund pool, but the risk had been placed in another statutory fund, created for that particular policy. It was deliberately designed so that if they had a run on claims, say in a pandemic, claims were no longer be paid, once the specific small pool for that product was exhausted.
Sadly, this is not the first time I’ve seen an insurer seemingly pluck an unknown policy term out of thin air to suit their particular objectives. As advisers we should of course always read the policy documents and we should be able to assume that everything relevant to those policies is contained in the policy document, and with luck, in the PDSs. Which raises the next question: what other forms of discretion is available to insurers in the so-called in-house “policy rules”. Advisers are effectively members of the mushroom club as to these in-house policy rules
As we know, none of these policyholders that are now part of the I-extend offer, engaged with I-extend of their own volition, without consulting their adviser. That adviser, upon review, would have assessed whether or not there was still a need for the policy, and looked at ways of reducing sum insureds, if at all possible. The aim would have been to reduce premiums and retain at least some cover, knowing of course that the premium would be increasing within the next 12 months because of the inevitable occurrence of birthdays. That’s called acting in the best interests of a client.
The introduction of special premiums for a particular class of policyholders, and not a particular class of life insureds based on occupations or smoking status, is an appalling short-sighted decision. The end result will be advisers will vote with their feet, rejecting that particular insurer for any new business, and probably seek to move some existing policies where health currently permits re-underwriting.
I understand there may be some legal action on this matter or at least opinions are being sought. But as Don Trapnell outlines, is this the only time we will see this occur or has it set a precedent? Where are the explicit rules which allow an insurer to pursue this type of activity. Where is the regulator APRA, and for that matter, ASIC. Exactly what are we getting for the ASIC levy
And why, pray tell, wouldn’t this particular action not constitute “misleading and deceptive behaviour” at the time of policy inception, as defined in the Trade Practices Act. Such a demonstrable betrayal of the principle of good faith reminds one of some of the antics of the Trump administration
Don Trapnell is spot on: “A new death cover class sets a precedent that has the capacity to erode consumer trust – in insurers, in the industry, and in life insurance itself”.
And as one final question which should be considered by the ACCC: this insurer is currently seeking approval for the takeover of Clearview life, an innovative insurer with a good claims-paying record. Should the policyholders of Clearview have any concerns?
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