Did a financial advisor set up your insurance? What you need to know

Seeking insurance advice from a financial advisor should leave you feeling confident you have the right cover to protect yourself and your family.

Being adequately covered if things go wrong is important, which is why the following insurances exist to relieve stress and financial hardship when times get tough:

• Life insurance – a lump sum to support your family and dependents;
• Income Protection– a monthly benefit while you’re unable to do your usual job due to injury or illness – income protection generally covers you for up to 75% of your current income, plus super;
• TPD (Total and Permanent Disability) - a lump sum if you’re permanently unable to return to work that you’re suited for by education, training and experience; and
• Trauma benefits - a lump sum if you suffer from a specific medical condition such as a stroke, multiple sclerosis or heart attack.

The level of cover you may need changes throughout life, and if a financial advisor arranges your insurance, it’s reasonable to expect them to ensure your cover is always enough to match your current lifestyle and expenses.

The risk of being underinsured

Unfortunately, many Australians only find out they are underinsured when it seems too late – at the time they need to make a claim.

“If you use a financial advisor for your insurances, and they don’t conduct an annual check to ensure you’re still adequately covered, you could be exposed to underinsurance,” says Josh Mennen, Principal Lawyer for Financial Services Disputes claims.

Financial advisors are required to review their clients’ financial plans as part of the ‘six step financial planning process’ as outlined by the Financial Planning Association of Australia. If they don’t, it can end up leaving you significantly out of pocket.

“For example, you receive a pay rise and your financial advisor does not increase your income protection insurance to reflect your new income. Say the income protection payments you’re covered for remain at $3,000 a month, while your pay has increased to $5,000 a month. It’s a significant blow if you need to claim these monthly benefits.”

Another common example is if you start a family or buy a house, but your financial advisor does not increase your life insurance to reflect this. In the event your family needs to make a claim, this can again result in your insurance payments not covering living expenses; causing financial stress on top of everything else your family is already going through.

How to reduce your risk of being underinsured

When engaging a financial advisor for insurance purposes, one of the most important questions to ask them is if they will conduct regular reviews of your financial plan to ensure your insurances are set to the right cover for you and your family.

If you find yourself in an unfortunate situation where you’re underinsured after purchasing insurance through a financial advisor, we may be able to help you receive compensation.

Michael’s* story

While Michael, a construction worker, was organising a home loan with a bank, the bank offered to arrange a meeting with their internal financial advisor to also discuss Michael’s superannuation and insurance needs.

Michael already had some basic default insurance through his super fund, which was insufficient for his needs given his income and liabilities.

The financial advisor recommended Michael apply to take out income protection insurance with the bank’s in-house insurer for $5,000 per month. This was significantly less than 75% of what he was earning at the time.

Michael received a pay rise a year later and advised the bank of this. The financial advisor then recommended he increase his insurance cover to $6,000 a month, but this was still less than 75% of what he was earning.

Another year later, Michael, unfortunately, needed to make a claim after an injury stopped him from working. It was at this time that he realised he was significantly underinsured for income protection, only being covered for about 60% of his pre-injury income. This placed Michael under extreme financial stress, particularly after thinking he had done the right thing by obtaining insurance advice from a qualified financial adviser, who he thought gave him appropriate advice for his needs.

Fortunately, he got in touch with us and we were able to bring a claim against the bank for the conduct of the financial adviser, claiming compensation for the past and future income protection cover he should have held.

Contact us today to receive a Cover Check and to find out how we can help.

• Read more about underinsurance in Australia
• Read more about superannuation claims

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