Louie Dimovski

The Conundrum with Terminal Illness Benefits

Blog Post created by Louie Dimovski on Aug 5, 2016

Over 12 months ago, the Australian Government announced legislation changes to enable earlier access to superannuation for people with terminal illness. The relevant SIS Legislation was amended to extend the life expectancy period from 12 months to 24 months, effective from 1 July 2015, which allowed members to access their superannuation if two medical practitioners have certified they have a terminal medical condition that is likely to result in their death within 24 months of certification.

Life Insurers slow to act


While Australian Life Insurers have been responsive in updating definitions of terminal medical condition within their respective PDS documents they have yet to align their terminal illness benefit with the SIS Act condition of release. This delay in action can have a couple of serious unwanted consequences:


- further expansion of negative sentiment towards the Life Insurance industry and its willingness to pay claims as terminal illness cover does not match up to consumer's general expectations; and


- where death cover is held within superannuation master trust, it opens up the scenario where accumulated funds can be withdrawn and the policy lapsing either i) due to non-payment of on-going premium requirements; or ii) being cancelled if the super fund is subsequently closed down.


Pricing Impact


In recent years, premiums for retail death cover have been stable, if not somewhat on a slight downward trend. The hesitation for retail policies to upgrade to a 24 month terminal illness definition will no doubt be due to the expected impact that such a move will have on future claims and the sustainability to the current pricing regime. Are policyholders willing to accept paying more for a higher level of coverage? If not, does this mean that we should expect an increase in lapse rates in the short term?


There may be no choice


A number of Retail Super Fund and Industry Fund providers have already moved to a 24 month terminal illness definition, providing a rare instance where superannuation platform based insurance cover is more generous than their counterparts in the personal retail sector. It would be somewhat surprising if Retail Life Insurers let this position stand for too long as they look to re-establish their position as being the providers of more comprehensive coverage when compared to the non-advised products.


Furthermore, we saw how Retail Life Insurers can quickly implement policy improvements when faced with a barrage of vitriol against them from the general populous following the Fairfax/4Corners investigation into CommInsure's claims management practices. The memory of this 'scandal' is still too fresh in the industry's mind to allow itself to be exposed to another situation of not meeting the consumer's expectations.


The most important thing


Let us not forget the primary purpose of life insurance, which is to provide financial assurance when it is most needed. Imagine being diagnosed with a terminal illness and irrespective as to whether you have 12 months or 24 months to live that time will always seem too short. Perhaps this is a circumstance where the ability to maintain a profit margin can give some leeway to providing a better quality final years of life.