Last one out, please turn off the lights.

In a recent release it was confirmed Westpac has sold it’s life insurance Business Westpac/BT Life to TAL Dai-Ichi Life, which will now be the largest insurer on the Australian market by a wide margin. This marks the final separation of Banks and Life Insurance companies in Australia. So where to from here and what does it mean for existing customers? As always, the devil is in the detail so ill try and break this down in key points but don’t miss out on all the embedded hyperlinks.

If you’ve been paying attention, you will know that since the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry began in 2017 banks have been running for the doors. Prior to this BT/ Westpac was well positioned as a life company as not having a large “legacy” book but also having a good quality product with significant new business prospects. This was aided significantly by their associated BT Financial Advice arm which allowed them to distribute their products and they invested heavily in technology and consolidation of funds management platforms such as IOOF, St George, and BT wrap which are only now in the final stages of consolidation into BT Panorama, which has been leading the field in many aspects of platform innovation.

It appears Westpac/BT lost out on the game of musical chairs when they realised a little too late that the music had stopped. Banks have now all exited advice, financial advice red tape went to insane levels while the carrion birds began to circle. The objective of the Royal Commission was to protect consumers (ordinary Australians) but it would appear that in the mayhem the only winners so far have been unregulated channels like bitcoin, gambling and industry super (if you really want to nerd out, see this sitting of the House of reps last week starting at 13:58:15 but my favourite part was at 14:43:21) advisers, product manufacturers and of course consumers have all borne the weight of these changes as the regulations pile on.

BT also made some headlines recently with significant premium increases. They had been one of the hold outs on premium increases as it has been over a decade since a “re rates”. In order to balance their books, and look even half attractive for sale, they opted to increase in one relatively large hit rather than stager over many years as most insures have done. There are numerous factors completely external to BT and life insurance as a whole at play here but the core is that sustainability is in question.

So what does this mean for BT customers?

Well, other than premium increases that were already on the cards not much will change. This sale is yet to complete until end of next calendar year and even then it’s unclear if TAL will continue with BT as a separate brand and business unit as they are doing with Asteron right now or if they absorb it into their own book.

One thing is for sure. If you have a BT contract this can not be changed to your detriment. The very core of “guaranteed renewable” insurance products is that as long as your continue paying your premium they can not be altered. Even if they are not on sale any more as we have seen with the removal of Agreed value income protection last year.

It is however possible that medical definitions will not be upgraded in keeping with current definitions as was dictated by the code of practice as this will likely no longer be an “on sale” product. BT have market leading definitions at this point so its uncertain of how quickly these degrade.

Level premiums and sustainability of legacy products

This type of premium structure is often misunderstood as “your premium wont go up”. This may have been true for some years, or even the past decade with BT, but this is not how it really works. Premiums are based on the age you took it out so yes, theoretically you could begin a policy at age 34 and still be paying the premium of a 34 year old at 64, when you are far more likely to claim, but re rates mean that even 34 year olds are more expensive than they used to be. This is exacerbated with legacy products when there are no new entrants to the insurance pool. This article goes into more detail.

The writing is on the wall, can you self insure?

Current insurance products are simply too generous and with low interest rates, low affordability and high claims its clear that they are not sustainable.

The previous assumption that you could rely on life insurance products such as Income Protection and TPD to cover you for long or even medium term illness throughout your working life appears to be flawed.

Early in your career this strategy may still remain cost effective but over the long term we are seeing a shift away from this reliance to a more balanced approach to risk protection. This involves superannuation savings and debt reduction for extreme cases but also needs to consider grown more liquid assets with time based outcomes such as 3 months, 5, 10 or even 15 years.

I do often hear the classic “I’d have been better off putting my premiums in the bank!” Well, early in life when you have millions of dollars in potential earnings and premiums might be a couple thousand per year this is obviously flawed but the paradigm of being able to rely on an insurer long term is certainly changing.

As always, you should work with a licensed adviser to help you establish a strategy that is right for you. All events that are covered by insurers are financially significant and should be given the gravity that they deserve. Insurance companies of course know this and design products with this in mind and far more often than not act with their policy holders in mind. Not only because they are made up of people who actually care about their claimants and policy holder but also because they are bound by more contract laws and regulations than most other industries.

The reality of this situation is changing every day. We have a significant dates coming up in early October with IP contracts being stripped back to basics and DDO coming into place. If you saw the House Standing Committee on Economics sitting (link above) last week you might agree that there is a slow realisation that red tape has gotten out of control and removing some of this should go a long way to turning back the tide.

With this unclear future, even with rising premiums, if you have a guaranteed renewable contract its nice to know you are well covered while this all settles down.

As usual this is my thoughts based on my experiences and readings. While care has been taken this is not to be relied upon as personalized advice and Shaun Clements and NOR Financial as an authorized representative of Dirigere Advisory has provided this only for education purposes.