Welcome (back) to our Six Stones series. Our financial adviser, Jordan, is sharing as many tips, ideas and advice for people going through a divorce as a humble blog will allow.
He’s staying away from specific financial advice – it’s all general advice over here, be sure to get personal financial advice before doing anything – but we hope you find some useful information in here as you navigate through/out of your divorce.
In our last post, we introduced a few of the big concepts you should be aware of when you start arranging insurance after your divorce. We continue that theme in this post – hopefully it helps!
Everything else about insurance is background noise when it comes time to make a claim.
This is when you – or your family – contacts the insurer and says “excuse me, this has happened and we’d like you to pay the money now, please.”
The overwhelming majority of legitimate claims are paid by insurers. Despite what you might see in the more sensational media, or marketing material from some of our more…creative…legal firms, insurance claims are – on the whole – paid.
But not always, and not always quickly enough, and not always fairly. These exceptions are where most of the pain and work go.
They can be declined for any number of reasons, which we’ll explore shortly, but I do want to emphasise that claims do get paid.
And this is coming from a lifelong cynic who’s helped through quite a few serious claims disputes – don’t let the bad news exceptions make you think they never pay claims.
Your Duty of Disclosure
This one is important. It’s a legal duty putting a powerful set of obligations on you when applying for insurance.
What this duty is basically saying is that you should tell the insurer anything that you – or a reasonable person – would think the insurer would need to make an informed decision about your application.
Put another way – don’t keep secrets from the insurer, don’t lie on your application form and don’t be creative with your answers.
Be honest, answer the questions truthfully and let the insurer make their decision.
That way you can be confident that when you go to claim, you’re more likely to get paid. You’ll know that the cover you’re paying for each and every year has been tailored for your personal situation.
So, be honest. It’s easier.
It’s a good rule for life, but especially good when applying for insurance.
I’m going to ignore insurance you automatically get through your super fund here, for reasons that I think will become obvious.
But – when you apply for a new (retail) insurance policy in Australia, you’re essentially asking the insurer to accept the risk of The Thing happening to you for as long as you hold the policy.
Because insurers cannot cancel or change the terms an insurance policy on you (it’s called ‘guaranteed renewability’ in that wonderful way we have in finance of making everything sound like it’s come out of a consultant’s fingertips) as long as you keep paying the premium.
So when an insurer is assessing how ‘risky’ your application is, they’re looking at it as, potentially, a lifelong commitment.
Which means they need to know more about you before they decide to accept your application. This process of assessment, questioning, investigation and deciding is called underwriting.
There are vaguely interesting historical reasons it’s called ‘underwriting’, but it’s more important to know what it actually looks like.
When you apply for insurance, your application form will include a rundown of your basic personal details – name, address, the rest of it – as well as what’s called a ‘personal statement’.
This personal statement is a privacy managers worst nightmare. It asks a detailed series of questions about:
– Your current personal situation
– Your medical history
– Your occupation
– Any hobbies or pastimes
– Your family’s medical history
– Sometimes, your financial situation as well.
It can be a little confronting going through these questions (there’s one that’s particularly uncomfortable to ask called the ‘lifestyle question’ – I’ll leave it to you to pick which one it is).
But it achieves a few things that make it worth doing:
It lets the insurer properly categorise the specific risk they’re taking on, which means they can tailor the pricing of the policy so that the higher-risk cases pay more than the lower-risk cases. (This is where the positives of the discrimination I mentioned in the last post come in).
It should also help you feel confident that the rest of the pool has been properly assessed, so you’re not paying more than you need to allow for higher risks in the pool.
Full and frank disclosure through this process makes the resulting policy even more valuable because you know you were honest upfront.
When done properly, the rigour of this process – discomforting though it may be – is what makes retail, underwriting, guaranteed renewable insurance so valuable.
After the underwriting process is complete, the insurance company will come back with one of four decisions:
1) ‘Accept on Standard Rates’
meaning, “sure thing, come on in, no changes necessary.”
2) ‘Accept with a Loading’
“sure, come on in, but there’s a higher risk of something happening, so we need you to pay more.”
3) ‘Accept with an Exclusion’
“happy to have you come on in, but there’s no way we’re covering that. Everything else – no problem, but not that.”
“No, thank you.”
If the decision is 2) or 3), you’ll need to review their offer and decide if you’d like to proceed. How do you make that decision?
Well, each situation is unique so it’s impossible to lay down firm ground rules. But, as a general rule of thumb, ‘loadings’ are preferable to ‘exclusions’ because even though you’re paying more, you at least have comprehensive coverage.
But even so, the offer might be so far below what you wanted that you’ll decide to decline. That is entirely your prerogative. And, to hit that scratch on the record again – it’s always better to make an informed decision like this, than an uninformed one. Even when the information isn’t that great.
There are other things you should know about when it comes to insurance, but these are the biggies. Arming yourself with some knowledge around these areas will leave you well-positioned to navigate the jargon-filled and, sometimes, downright weird, insurance application process.
In our next few posts, we’ll drill down into more detail around the specific types of life insurance we’re talking about.