We have had calls from clients asking questions about the financial security of life insurance companies in Australia after the recent issues with AIG in the USA.

The following Q & A has been kindly given to us by the Risk Store and is reproduced with their permission. Its aim is to help you understand how the Australian companies protect their policy holders.

I have an existing policy – will I lose this cover if the company goes out of business?
NO – under legislation another insurer will take over this policy and continue the cover as long as the premium continues to be paid.

If I keep paying an existing policy right now could I ‘lose’ the premiums?
NO – the only way you can ‘lose’ premiums is if you make the mistake of allowing your policy to lapse. You will then lose the value of your policy being a ‘guaranteed renewable’ contract. This would be a very dangerous thing to do as you may be unable to apply for insurance later if you develop a health problem in the meantime or if your health is not as good as when you took out the policy.

What if I happen to be in the middle of a claim? Will I lose the ability to continue with that?
NO – legislation will mandate that your claim in progress will be transitioned to a new insurer if necessary.

Why is my policy secure in this way?
Life insurance in Australia is protected by its own special Act of Parliament (refer to the Life Insurance Act 1995 – Act No 4 of 1995 as amended; parts 8 and 9). This forces insurance companies to place funds into a special account (called a statutory fund) that cannot be accessed by the company to use as operating funds or to distribute to shareholders, until all appropriate allowances have been made for a reasonable level of ‘expected’ claims and claim expenses.

In addition there were amendments made to these laws in the 1990s, which mean a special manager (called a judicial manager) will be allocated to the insurance company if they cannot continue to operate. This manager’s key role is to arrange for other insurers to take on the existing policies and claims.

But this is all very well in theory – does it really work?
YES – this system has already saved the policies of thousands of policyholders whose insurance is now held by a new insurer, when two companies in the industry were affected by fraudulent misappropriation of funds in the late 1980s. The laws are even tighter now, too.

If another insurance company takes over my policy can they change the terms I currently have?
NO – they are bound by the terms of an existing pure risk contract, including your current acceptance terms. (At present no insurer guarantees the ongoing premium rate for any group of policies, so it is possible that premium rates across a product type can alter with any insurer. They cannot alter your individual rates, however).

If you have any concerns regarding your insurance contact your financial adviser or give us a call on 1300 766 323.   

 Please Note:

This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. This information is provided for persons in Australia only and is not provided for the use of any person who is in any other country.

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