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Why life insurance is a necessity in tough times

TAL’s Jim Minto argues that while the current economic climate is continuing to worry consumers, now more than ever is precisely the time financial advisers and insurers should encourage their clients to hold on to their life insurance policies.

It’s impossible to open a newspaper or turn on the television these days without seeing a story on the tough economic environment and rising cost of living.

As the headlines paint a picture of Australian workers under more economic pressure than ever, consumer confidence is taking a battering, particularly within the sections of middle Australia not currently prospering from the resources boom.

The statistics are sobering, and the figures portraying a lack of job security among the community are particularly worrying.

Despite the national unemployment rate remaining a relatively steady 5.1 per cent as at April 2012, the availability of full-time work for those who want it is decreasing.

Of the 3.4 million part-time workers in Australia, 24 per cent would prefer to work more hours but had not been able to do so.

At the same time, and perhaps of more concern, the length of unemployment is also increasing: according to the latest Australian Bureau of Statistics figures, the number of people who have been out of work for between six months and two years has grown by more than 40 per cent over the five years to April 2012.

This difficulty in accessing work for many Australians, coupled with the rising price of key goods and services such as petrol, utilities and childcare, is making many in the community nervous about the security of their finances.

It’s all about priorities

With household budgets being squeezed, and consumer confidence weak, some families are wondering whether life insurance is something they can do without. We’re hearing from our financial adviser colleagues that many clients are either letting their policies lapse or are asking for less comprehensive (and, often, cheaper) cover at renewal time.

While this desire to cut back is understandable, it seems perverse to me that many families feel they have to let their policies go just at a time when claims around the country are rising, and particularly in white-collar areas.

Insurers are currently fielding rising numbers of claims related to the stresses and strains of difficult economic conditions. We are seeing a significant upswing in the number of income protection claims related to the human fallout of the global economic crisis.

Of the $145 million we paid out to help policyholders maintain an income stream when they were unable to work last year, around half of payouts were related to stress, depression or back pain (claims for back pain are often related to stress).

Our youngest claimant was 20, the oldest 70 – showing that consumers across a wide cross-section of the community are in need of financial support to get themselves through periods of illness or injury.

Our experience of rising claims is borne out by both the latest Australian Prudential Regulation Authority Quarterly Life Insurance Performance statistics and recent research from The Risk Store, which shows that the 10 biggest life insurers in Australia paid out just under $4 billion in claims in 2011, up 11.4 per cent from 2010.

Life insurance has always competed for a slice of the household budget, so the challenge of maintaining relevance in consumers’ minds through tough economic periods is nothing new.

But with more people claiming against their policies than in the past, rolling the dice to forego or reduce cover is riskier than ever.
The way forward

Life insurance is a necessity, not a luxury or something that should be done without. It is in times like these that the financial backup of life insurance is most needed – more than in the good times.

People earning income are under threat more than ever, and it’s vital to protect them.

The life insurance and financial advice communities must work together to educate the community on the importance of life insurance, and move cover from the ‘nice-to-have’ list to the ‘must-have’ list for middle Australia.

After all, while the global economy and investment markets, or accidents and illnesses, are outside our control, we can control our ability to provide for ourselves and our families if ill health or injury affects our ability to work.

Surely that’s peace of mind worth having in tough economic times.

Jim Minto is managing director of TAL Limited.