Look before leaping into new life insurance

By JANINE OGIER

Life insurance is one of those things most of us would rather not think about. But if your insurance broker suggests switching to a new company it would pay to think twice.

There could be good reasons for moving, but you could also be a victim of "churning" - where advisers encourage customers to change insurers to generate income.

Before agreeing to such a change, be sure you understand the implications of moving and remember that brokers are paid a commission when they bring new customers to an insurer. Those commissions can be as much as two years' premiums.

"There are an awful lot of people that we see that change cover because they think they are going to pay less premiums but the cover they get isn't as good," says Insurance and Savings Ombudsman Karen Stevens.

She says there are two main things to be aware of when thinking about changing insurers. The first is that your health may have changed since you took out the existing policy, perhaps a hip replacement or a mild heart attack.

"If they [policy holders] are covered under the current policy for any of those conditions they need to be very careful before they get a replacement policy, because chances are they are not going to be covered under the new policy."

The second major issue is disclosure. Her office often hears from people whose claims are not being paid because they did not disclose all medical conditions.

Any information that changes the terms on which the insurance was offered must be provided to the new insurer, as it would be important to an underwriter - the expert who sets the details of each person's policy.

For example, an abnormal prostate test might mean an underwriter sets a higher premium or excludes that risk from a policy.

"If the person fails to disclose it the company can avoid the policy back to the beginning," Stevens said.

That means the company treats the policy as if it never existed, pays back all the premiums - and doesn't pay out on the claim.

A critical time is the changeover period between policies, Stevens says. For example, you might visit your doctor after meeting the adviser. The results are relevant to the insurer but you don't tell the adviser before the new policy is issued, so it could be avoided by the insurer.

Stevens says people often complain that they didn't know they had to tell the insurer about medical issues. But legally it doesn't matter if the non-disclosure is innocent; claims won't be paid.

"People must understand what they are buying - they must read the documents," says Stevens.

Vance Arkinstall, chief executive of the Investment Savings and Insurance Association, which represents life companies, emphasises that life insurance policies are for the long term.

"We all get older and our health changes and these are policies that are not easy to change," he says.

Arkinstall says legitimate reasons for switching insurer are when an existing policy is no longer appropriate to a person's circumstances, to get better service, improved benefits, or a lower premium.

To protect clients, the association requires its members to complete a form each time a replacement of business is made.

The document requires the adviser to detail the new and old contracts and answer questions such as the specific reasons for replacement and how the new policy differs from the old.

"People should not rush into changing. It is a move that should only be made after the individual is satisfied it is in their best interests," says Arkinstall.

If a broker suggests changing insurers, you should ask what is better about the new policy and what you are giving up.

"The dangers are if poor advice is given, the customer could end up with a policy that provides less cover, or doesn't provide the right level of benefits, or provides less benefits than they had before."

And if you switch, it is essential to make sure the new policy is up and running before the old policy is terminated.

The Financial Planners and Insurance Advisers Association (FPIA) says it does not condone churning and has codes of practice and ethics backed by a strong disciplinary process.

Chairman John R. Bunny says there are fewer "cowboys" in the industry than two years ago and churning for commission's sake alone is now less common.

"As a consumer you should become suspicious if you are told to completely change all you have got and change from company A to company B."

He suggests getting a second opinion before moving.

As your personal circumstances change, part of the process of risk and financial planning involves reviewing your insurance cover.

Simon Swanson, managing director of life insurer Sovereign Insurance, says policy holders contemplating changing insurers need to consider the companies' ability to pay any claims.

"Ask your broker what is the financial condition of the company you are changing from and to."

Ask if there is any fundamental change in what is covered and if there are any exclusions or pre-existing conditions that are not going to be covered. Those three queries knock out the churn risk.

He says it is legitimate for brokers to receive an up-front fee for bringing in a new customer, but how big that should be is debatable.

He believes commissions will come down over time and that will reduce the incentive for churning.

By international standards New Zealand brokers' commissions are high, especially the proportion of the commission which is "front-loaded" or paid at the beginning.

Milton Jennings, chief executive of insurer Fidelity Life, says the normal commission is 150 to 200 per cent of the annual premium and an average premium is $1000 to $1500.

That means a broker's reward for shifting a client can often be $1500 to $3000.

He says that despite the ethics code, some FPIA members do churn policies.

"They don't control it in any way - the only ones that can control it are the insurance companies and they make it easy for you to shift by offering shorter underwriting."

That means the new company accepts the decisions made by the previous insurer and there are fewer medical questions for you to answer. But what can fall through the cracks is the medical history between joining the old company and changing to the new one.

"I have seen a lot of that happen in the market and that is the really sad thing about this transferring from company to company - you risk losing the cover you did have," he says.

If you are concerned about premiums or offered alternative cover, Jennings suggests consulting the adviser who signed you up with the original insurer. You should be able to negotiate ways to reduce the premium or compare differences in the policies. Otherwise go directly to the initial insurer yourself.