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Sunday, 1 October 2006

Insurance

Insurance is undoubtably a "good thing". Unfortunately there is still an archaic commision-based sales system in place that adds huge costs to many insurance products.

While you can shop around via the internet for car and home insurance these days, and competition has therefore brought costs down, the story seems to be totally different when it comes to life insurance and loss of income insurance.

I have my life insurance via my company's superannuation scheme, which has the benefit of being paid for out of "pre tax" dollars. The group rates that apply are comparable to what I could get outside of super [I think the situation would be different in the US where there is more discretion in the setting of individual rates]. However, the downside is that this requires being a member of my company's "preferred" superannuation provider. Now that "choice of superannuation fund" has become a reality in Australia, I'm tempted to shift from my current BT/Westpac scheme into one run by Vanguard in order to save on fees, but I'm not sure that I'd be able to get the same amount of Death &TPD life cover outside of my superannuation scheme.

The BT scheme I'm in has a MER (fee) of around 2.25% of my superannuation balance, although I'm lucky that my employer has arranged for a "rebate" of some of the fee back to members. This reduces the overall MER to around 1.5%. This is still a fair bit higher than Vanguard Superannuation, where fees start at around 1.1% for the first $50,000 (.75% admin/plan fee + .29%-.37% management fees) and then reduces to around 0.85% for the balance above $50,000. Over 20 years the extra 0.65% would have quite an impact on the final balance when I retire! Based on published research about the likelihood of getting outperform from an active fund manager vs. an index fund, I don't think I'll end up ahead by paying the higher management fees.

Even with the Vanguard Fund, the fees in Australia are significantly higher than what Vanguard charges in the US. And in the case of the Superannuation funds, I can't see why the .75% admin/plan fee on the first $50,000 ($375) can't cover their cost per plan for administration overheads. As far as I'm concerned the admin fee for the balance over $50,000 should be zero, and their profit margin come only from the 0.29% - 0.37% management fees (more than sufficient for a mix of index funds!)

My other main insurance expenses are private health cover (around $50 /mo) and around $75 /mo for income protection insurance. These too have negatives - the medical insurance is really only worthwhile to save tax - otherwise I'd probably have to pay a medicare tax surcharge the same or higher than the insurance is costing. In terms of benefits, the hospital-only cover we've got has reimbursed one ambulance fee in the past five years. It was of no use for the delivery of our baby last month, as we couldn't arrange accomodation at the private hospital, so had to "go public". In any case the care in public hospitals is generally just as good as private, and being a private patient would still have cost us several thousand dollars more out of pocket due to the gap between the medicate scheduled fees, the private cover, and what the private charges are. I suppose the "payoff" for having private cover will come if we ever need "elective" surgery, such a hip replacement or some such.

The loss of income insurance costs are not too steep. Planning of working for another 20 or so years before retirement, and having two kids, the odds (around 20%) of suffering a medical disability that severly reduces my income earning ability and increases living costs is too high to be uninsured. Having a two year waiting period before payments commence kept the premiums down - I rely on having several months paid leave and sick leave accumulated, plus sufficient investments to see me through. One thing that does irritate is that the loss of income insurance pays "commisions" of 50%+ of the first year's premiums to the online insurance agent I used to arrange the cover. And, what's worse, they will be getting a "trailing commision" of 30%+ of each payments I make in future years!

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