When it comes to investing in property with some level of surety and mitigating any associated risk, one of the things that is perhaps least talked about – but really deserves more attention – is insurance coverage.
Many an ‘expert’ will instruct investors as to sourcing and securing the right kind of property asset and property loan, but rarely is enough attention given to the subject of how you assess and obtain the best possible insurance policies to protect yourself, as well as your property portfolio.
This is a somewhat timely subject to look at right now given the increase in insurance brokerage firms, product options and comparison sites flooding the sector, along with a marked rise in clients turning to financial advisers in a bid to identify the best policy for their needs.
But while these services promise to qualify products currently on the market for your convenience, the question remains; who is actually qualifying the brokers, advisers and comparison sites? And more importantly, how are they assessing and referring business to particular insurance companies?
Getting paid to point you in “the right direction”
Worryingly, a recent Australian Securities and Investment Commission (ASIC) survey found that more than one-third of consumers advised on life insurance by financial planners, received guidance that fell short of meeting relevant legal standards. And when advice did comply with regulations, there was significant room for improvement.
Interestingly, of the 202 files surveyed by ASIC, advisers who did not receive upfront remuneration had a far better track record at rendering meaningful assistance to clients, than those paid immediate commissions for converting a prospect, with pass rates of 93% and 55% respectively.
Unfortunately, commissions paid to financial advisers and insurance brokers can be incredibly lucrative, representing anywhere between 100 and 130% of the new business premium.
What does this mean for you and I, the consumer? Well, it seems there’s a giant conflict of interest preventing everyday Aussies from securing the correct insurance premiums. You could be receiving inferior policy terms, paying too much for unnecessary coverage or end up making a claim that is denied because of restrictions you were not adequately informed of.
This is a deeply concerning trend for property investors in particular, who often hold numerous assets in their portfolio and may very well rely on these personal insurances to prevent losing everything one day down the track, should their health and wellbeing be compromised in some way.
Insurance is big business in Australia, with the premium value of individual life risk policies (including life, total and permanent disability, trauma and income protection – all things investors need to consider) totalling $8.4 billion in 2013.
So how do you ensure you are adequately covered when it comes to protecting your all-important cashflow, without falling victim to a less than scrupulous adviser?
Here are 8 things you should do when exploring insurance options, not just for your assets themselves, but also for you as a high net worth investor.
- Assess your needs and make sure the coverage aligns with them. This includes careful consideration of your life stage – do you have a family you need to take care of if you lose all or a portion of your income due to an injury or illness? Do you need to maintain loan repayments on a number of assets across your portfolio? Are you covered for all possible events that could impact on your cashflow?
- Compare products. There are so many different companies and products on the market now that it’s essential you have some idea as to who offers what. Even if you intend on seeking expert assistance in eventually selecting a policy, you need to know what’s out there as an informed consumer. This isn’t just about saving money upfront either, but also potentially saving a lot of future heartache by making sure the policy you select is aligned with your requirements.
- Qualify an adviser before taking their advice. Regulatory bodies are considering how to enforce tighter restrictions on things like upfront commissions paid to financial advisers and insurance brokers that can create a conflict of interest for consumers. However, right now, it’s most certainly a case of ‘buyer beware’. Ask your adviser if (and how much) they are paid by the insurance company they recommend and what process they undertake in qualifying the best product for your needs. If they seem disinterested in finding out as much about your personal circumstances as possible before thrusting a product disclosure statement at you, be wary.
- Get it in writing. Never sign or agree to anything before reading through all related information carefully and critically to ensure the product summary reflects your specific needs.
- Read the fine print. Most insurance product disclosures are more complex than a Year 12 Physics textbook. Always read the ‘fine print’ and make sure you fully understand what happens in the event of you making a claim and any restrictions or excesses that may apply to your policy.
- Ask questions and speak to an adviser from the insurance company. Don’t just rely on a broker or adviser to point you toward the right premium. If they recommend one company and policy over another, speak to a company representative and ask as many questions as possible before signing anything!
- Be specific – find out if you are covered for all the little things you might need. Depending on your career, you might have certain needs that others do not. Insurance is not always a one-size-fits-all prospect, so make sure the policy you end up with is adequate.
- Review your policy annually and make any necessary changes. Never become complacent with your insurance. You should review your coverage annually, in line with your portfolio review. Is the amount of coverage you have still adequate? Have certain circumstances changed that you need to advise your insurer of? Can you find a better deal?