Many financial planners are insurance agents, multi-agents or brokers for life insurance. This means they can advise on life insurance, trauma insurance, total permanent disablement insurance, income protection and business expenses insurance.

Other forms of insurance, including property insurance, professional indemnity insurance, car insurance, professional indemnity insurance, workers compensation and various other products go under the banner of general insurance. Usually these other forms of insurance are handled by general insurance brokers and agents, sometimes financial planners deal in this... but not usually. At least for now I won't discuss general insurance, financial planners are more tied up with life products (those that do insurance anyway) so I'll confine this article to discussion of life products.

Health insurance deserves to be under a semi-separate category. It is more akin to a general insurance product, and is not usually sold by life advisers. Sometimes general insurance brokers deal with it, but often health insurance specialists, including many pharmacists who have entered the business as a sideline. Occasionally financial planners can write health insurance.

Life insurance

Life insurance is one of the oldest forms of personal protection insurance, and it is fairly simple really: the policy owner gets money if the insured dies. There are many reasons why one would want to take out life insurance, to pay out loans, to buy a full share of business if your business partner dies (this is called key man insurance), to pay for your funeral and to support your family after you have gone.

There are many different options available with various packages, all will (or should!) pay if you die, nearly all will exclude suicide and self harm as payable events (for the first 13 months of the policy anyway), some pay extra for violent death and some even pay for certain non-lethal events. For example there is an accident benefit paid out on Zurich Term Life policies, for certain serious accidents that lead to loss of limbs and eyesight you can get a payout of up to 100% of your life cover, even if you don't die. There are other examples of extras like this, Australia has a surprisingly large number of life companies, believe it or not Australian life insurance is a surprisingly competitive industry. There are also sometimes optional extras that pay a little more for certain death events, like extra money if you die from a violent, external cause. Most life insurers will pay up to 100% of the life insured amount when you are diagnosed as having a terminal illness and less than 12 months to live. This is paid out when a doctor approved by the insurer is able to confirm the diagnosis, which is very handy if you end up surviving your illness after all since once paid it cannot be refunded, provided the claim was not fraudulent.

Unfortunately, the overwhelming majority of people, particularly the young, are hugely under-insured. While you should guard against over-insuring and you need to be able to afford what you are buying, most people do not carry enough insurance.

For example (and this is not hypothetical, it is in fact the situation of a young couple I met this afternoon):

Husband: salary $35,000
Wife: salary $20,000
One child (aged one), another planned but not yet on the way.
Mortgage: $85,000
Other debts: about another $15,000
Superannuation: each have about $15,000

Together we concluded that regardless of which partner died, the survivor would have to cut back their working hours to look after the kid(s), we estimated that the income either could earn at this part-time work would be around $15,000 a year. So if either partner died, they would need about $40,000 a year to make up for the loss financially since this couple needed both incomes to survive. The loss of the wife would cause a financial problem disproportionate to her income, the husband would need to reduce his work load to look after the kid(s) or otherwise he would need to bring in extra help for childcare. In all it wouldn't have mattered which partner died, they would incur extra expenses for child minding and the survivor would probably earn less.

On top of that you can add probably $20,000 funeral, estate and medical costs.

How much insurance did these two need? There are various formula you can use, none of them particularly scientific, but they all lead to some big numbers! Just quickly though, as a back of the envelope sum:
Pay off all debts and final costs, $120,000.
Repay the salary for at least 10 years, $400,000.
Minus the deceased's superannuation.

This is over half a million dollars in insurance, we aren't even getting started with fancy formulae or figuring out the amount necessary to provide a lifetime pension. If either partner died tomorrow the survivor would be forced to either remarry or accept a rather pitiful lifestyle after about 10 years or so. Half a million dollars worth would not leave the surviving partner rolling in riches for the rest of his or her life, the money would last only until their daughter turned 10 or so, after which they would have to revert to a "single parent" type lifestyle. Kids aren't cheap, clearly half a million in insurance is not excessive by any stretch of the imagination, in fact one could even get wild and crazy and buy a million in insurance, provided the premiums are affordable. These numbers may seem huge up front, but I am sure if you think about it, in ten years time that money will be all gone.

If I was going to do this "properly", I would estimate the costs of raising their child to the age of 18 (or 21), paying for the kid's university education and giving them enough extra money that they can compensate for half a lifetime of lost salary from the departed spouse. We aren't trying to make instant multi-millionaires, but if you multiply your salary by 20, 30 or 40 you will see how much income you would have earned if you hadn't died. The shortfall will need to be compensated for, either by sale of assets or a huge cut in quality of life.

The reason I was seeing this couple was because they had asked me to shop around for cheaper life cover for them. It had turned out that I could offer them the same cover as what they had already for just over half the price that they were paying. Even better, I could offer them two and a half times as much insurance for the same premium. (Take note of this: shop around, the calculation methods used by each insurer differ greatly. In this case a certain insurer was incredibly cheap for them, while others were expensive. For someone of a different age, or a smoker, or someone of a different gender the cheapest insurer could have been someone else: no one insurer is the cheapest at any particular time, you need to get a dozen quotes. Next year the insurers will all be changing their rates again, the best deal could be with a different insurer again).

Previously, they had about $85,000 in cover each. For the same price I presented an illustration from a different insurer offering $200,000 in cover. They thought this excessive until I did the quick calculation above. They immediately agreed that $200,000 was not excessive, though did not feel they had the cash for a million dollar policy. As this pair were only in their mid-20s and were non-smokers, the cover was cheap. Including a certain amount of trauma cover it was about $300 a year to cover them both. Later on they will have lower debts and greater savings, the kid(s) will be old enough to look after themselves while mum or dad are at work so this pair can reduce their cover. I still felt they were under-insured, and they agreed, but $200,000 is certainly better than $85,000 and they agreed that at a future review of their case I should calculate their needs accurately for them and they will consider increasing their cover. In case you are wondering, no, the new policy was not worse than the old in terms of benefits, in fact it was much better! You must shop around extensively.

This is a fairly typical case, the sums calculated are invariably huge and invariably people balk at the figures, thinking they are excessive. On closer inspection though, people realise that their partner really will need all that money just to stay afloat for a few years. What a pity then that most of the people I meet have only really enough insurance to pay their mortgage. Premiums can be expensive, but if you can't afford the premiums then how on Earth could your family afford your death???

Young people are often the ones that need huge amounts of insurance cover, older people need much less as typically they have paid their house off and the kids are gone. It is ironic therefore that usually only older people want insurance, the young don't think they need it. Well of course the young are less likely to die than the old, but the young need greater levels of cover. This works out nicely in fact, for the young who need insurance the most but have the least chance of making a claim, cover is cheap. A couple of hundred dollars a year has you covered for a huge benefit. For the old, who are less likely to need as much cover but make more claims cover is expensive, often a few thousand dollars a year. You can actually get a premium freeze on many policies, where your premiums stay exactly the same year after year but the amount of cover decreases. This is a fairly popular option for many people.

Life insurance can be held through a superannuation policy. In this case the premiums become tax deductible just the same as superannuation itself. Which means that to a self-employed person they are fully tax deductible (up to the MDC limit). For an employed person they are not tax deductible, but they are tax deductible for an employer, meaning life insurance can be salary sacrificed just like super itself. For a spouse earning less than a certain threshold, presently around $11,000 or so (I won't give the exact figure since it will change yearly, and I don't want to have to go upgrading this page all the time!), you can buy life insurance through superannuation and claim a tax rebate (NOT a deduction), the rebate is calculated with a formula but is up to 18% of the contribution. These rebates and deductions are the same as for super in general, nothing special about insurance.

The only complication with superannuation life insurance is that the payment could exceed your reasonable benefits limit, which has tax implications. There is also a legislative problem with binding death nominations.

Apart from super, life premiums are not generally tax deductible, though the payout is not taxed either. The exceptions are when taking out life policies on people for business purposes. The premiums are tax deductible if you are taking out a policy on your business partner (key man insurance), but if you get paid you will be taxed on the money.

Premiums vary for smokers and non-smokers, with your age and with your gender. Some very hazardous occupations can lead to loadings or declined cover, however usually your occupation has no effect on the premiums.

Trauma Insurance

Life insurance sure is important, but it many ways it is obsolete! These days people don't die quickly. Thanks to the miracles of modern medicine, these days far more often people languish for several years with some horrible injury, and die a slow, undignified death. Noticing this, Dr Marius Barnard (famous heart surgeon, and brother of even more famous heart surgeon, Dr Christian Barnard, first to perform a human heart transplant) proposed what he called "dread illness" insurance. Barnard had noticed that while he, and his colleagues were becoming very good at prolonging life, this only led to the financial destruction of his patients. Not only were the patients incurring medical bills, but they were keeping healthy family members from working or simply not working themselves. Dr Marius Barnard, who I had a chance to meet a short time ago (he himself is dying of cancer, by the way - I sure hope he has trauma insurance!), said that in many cases he could see that the best financial advice he could give to his patients, and the family of the patient, was to hope for a quick death so the life insurance would pay out.

The idea took a little while to catch on, in fact Marius Barnard ran around to a great many insurers trying to get someone interested in his idea, but today it is one of the fastest growing risk products around the world. The overwhelming majority of claims made are for the big four traumas, cancer, heart attack, coronary bypass surgery and stroke. These four account for more than 80% of claims, however if you read an insurance Customer Information Brochure (the insurance equivalent of a prospectus), most insurers cover more than 30 specific trauma events, such as severe burns, head trauma, paralysis, multiple sclerosis, kidney failure, altzheimers disease, angioplasty and even "loss of independent living".

Trauma insurance pays a lump sum. If you survive the trauma, a linked policy that includes trauma and life insurance together will pay the trauma amount but reduce the life cover by the amount paid. If the policy has a buyback clause, then after a period, ranging from one year through to several years, you can buy life insurance for the amount you had before the trauma. Accelerated buyback options reduce the waiting time before life cover can be fully reinstated, though this costs extra. A stand-alone trauma policy usually only covers you for the trauma event, and will not pay on death. The fine print varies but usually you have to survive for a minimum of 14 days before the claim is considered a trauma event. If you die after only a week, a stand-alone trauma policy possibly won't pay out at all. If it is a linked policy and you die of the trauma event, usually you get paid the life insurance sum. You hit the jackpot of course (or your family does) if you have a heart attack, get paid the trauma amount, with your buyback get the full life cover reinstated and die after that, then you get paid twice.

Why get trauma cover? Because life insurance does not pay you at all if you suffer a long, lingering death, not until you die anyway. A stroke that leaves you paralysed will stop you ever working again, and screw you up financially, but a life policy won't pay you a cent. This is a shame if you end up so poor you can't afford to pay for your life premiums any more. A lot of people do end up in this situation, they have a pretty humiliating and miserable last few years, leaving only debts behind for their family.

Trauma cover can not be effected through superannuation. Some funds will offer cheap group rates on insurance as a loyalty bonus, but they are a separate product, not run under your super. Hence the premiums are not tax generally tax deductible, though the benefits are not taxed either.

Premiums vary with your demographics, just like life insurance. They assess you based on factors applicable to the whole population of guys (or girls) like you.

How much trauma insurance do you need? If you have a buyback clause then I'd suggest you set your life insurance up as I did for the young couple above, buy enough trauma insurance to pay your way for a couple of years so the family isn't financially ruined while they wait for you to die. (Sounds kinda harsh, I know, but that's how it goes).

Total and Permanent Disablement Insurance (TPD)

TPD insurance covers you for disability that stops you ever working again. It is a lump sum payout that you get when a doctor is able to pronounce you so severely disabled that you can not ever work again. There are two levels of cover. "Own occupation" is where you are insured on the basis that the doctor has to proclaim you unable ever to perform your own job again. This is handy if you are in a heavy, manual job, since it is somewhat easier to make a claim if a doctor pronounces you unable to ever lift big weights again. If you are in a clerical/office type job then you have to satisfy the insurer, or at least their doctors, that you won't be able to ever push a pen around again... kind of hard unless you got really screwed up. "Any occupation" is where they must proclaim you unable to ever work again, in any job for which you might be reasonably suited by education and ability. In other words, this second type of cover may give the insurer the right to test you for other suitable employment. A bad back might put you out of the removalist business but it won't stop you from taking a desk job. Naturally the second form of cover is much cheaper, since the insurers pay out less often.

TPD can be taken out through a super fund, just like life insurance. The reason why you can get TPD through super, but not trauma, is that if you are truly totally, permanently disabled, then you can apply to have access to your super early. If you have a coronary bypass operation you will be paid for trauma insurance but not necessarily end up disabled and unable to work again. The crucial difference is that trauma pays you for suffering a medical emergency, regardless of how well you survive the incident, whereas you only really qualify for TPD if you are unable ever to work again.

Factors affecting TPD premiums are the clients health, demographics and smoking habits, as well as occupation. It is far cheaper for an office worker to get TPD insurance than a heavy labourer. In fact for certain occupations it may be impossible to get TPD cover at a reasonable price (ie removalists, professional athletes), or cover is only available with an "any occupation" rule.

Income Protection Insurance (IP)

To replace your wage/salary if you are unable to work.

These policies only cover you for disability and sickness - not to replace lost income if you become unemployed. "Unemployment benefits" for Income Protection are where the insurer agrees to keep the policy going after you become unemployed while you look for work. If you come down with a horrible disease while looking for work you can claim under an IP policy. If you want something to cover mortgages against unemployment, consider credit insurance, which is not the same as the mortgage insurance that banks make you take out when getting a big loan. Talk to a general insurance broker about these types of insurance if you are into negative gearing, or simply have a huge house mortgage.

Premiums are affected by your age, smoking habits and gender just like with other insurances, but is also heavily influenced by your career choice. In addition it is cheaper to insure a small proportion of your salary than a large proportion. In addition changing the waiting period or the benefit period affect premiums greatly.

Basically, in this type of insurance, your premiums are affected by your health, and how much incentive you have to stay on benefits or go back to work. When looking at your occupation, the insurers are looking at more than just the physical demands of the job, also your training features in their assessment. A professional engineer and a secretary probably have similar risk exposure while at work. Both work in an office all day. The difference is that an engineer has had to go to uni and spend at least 4 years studying a very challenging topic, followed by numerous professional development upgrades and perpetual study. A secretary (no offense intended to secretaries!), has no where near this level of commitment to his or her career, and might not necessarily be as keen to get back to work. The engineer may well wish to get back to work as soon as he is healed up enough to be stretchered in to the office, but the secretary possibly won't be so keen. For an engineer to walk away from his or her profession purely because of an injury could well be a great personal tragedy, considering the effort expended to get that job in the first place.

Secondly, the insurer looks at how much of your income is being replaced. There is a ceiling of 75%. You cannot write a policy that replaces more than 75% of your income. If you earn $1,000 a week (gross), you can write a policy for $750. The rates are often cheaper for someone insuring 50% of their income rather than 75%. For example someone earning $5,000 a month could take out a policy that will pay $2,500 in benefits. This may be cheaper than someone that earns $3,333 taking out $2,500 in cover. The insurer figures the first one will be rather more keen to get back to earning their regular salary, as the recuperation period is costing them more money. This is purely earned income, you cannot insure passive income, like share dividends or rent, because presumably your shares won't go bust simply because you were ill.

A waiting period is a time during which the insurance company won't pay you, only when you have been sick for the whole time can you make a claim. There are a variety of waiting periods available, the shortest is usually 14 days. This means that if you broke your arm on the first day of the month, the insurer won't pay you anything until the 15th. The insurer does not then make a back-dated payment for the waiting period. Other wait periods are 30 days, 60 days, 90 days, a year, two years... it all varies, different insurers have different choices. Naturally cover gets cheaper with long wait periods. Insurers pay out all the time with 14-day wait periods, with moderate frequency when the wait is 30 days, and only rarely pay when the wait period is a year or more. The price difference between a 14-day period and a 30-day period can be as much as double, so the majority of policies in force have a 30-day wait period.

Benefit periods also vary and have an impact on the premium. The shorter periods available pay for one or two years, after which the insurance contract expires and if you are still sick you go on Centrelink payments. More commonly, people buy insurance that will pay for 5 years, but a better choice is cover to age 65. You may be quote surprised to see how similar the premiums often are with 5-year payment periods and payment to age 65. If the insurer allows payment to age 65 in your occupation, you should always go for the long pay period, extending the wait period if necessary. In most cases it would be cheaper to take out a policy with a 30 day wait period and payment to age 65 instead of a policy with a 14 day wait that pays for 5 years. Provided you can live for that extra two week wait I feel that the long payment period is far more desirable. For cost cutting I think it is always better to go for a longer wait period than a shorter benefit period. Other pay periods available for some occupations with some insurers include payment to age 60 and even a lifetime payment, meaning they continue to pay right into your old age.

An option to look at that I personally feel is essential is indexing of the benefit to inflation. It is all very well to insure 75% of today's income is insured until age 65, but 20 years down the track it will get harder and harder to pay the bills when inflation devalues your payouts. Known as "escalation options" or "indexing of benefits", this feature, which may be standard for comprehensive cover or optional for budget policies at an extra price is well worth the money. I really don't see what the point of a lifetime policy is if this option is not selected, even with a rather tame 4% inflation rate your benefits will effectively halve every 18 years, thus pulling the safety blanket right out from under you.

There are a variety of options available with an IP policy, some of which may interest people, others which may or may not be worth the extra premiums. There are wait period waivers for certain injuries, these things start to pay immediately for certain unfakeable injuries (like leg fractures and severe burns), rehabilitation benefits where they pay a little extra for house modification (installation of handrails in the shower and wheelchair ramps, etc.) Also sometimes a bit of free life insurance is chucked in (ie three months payments) and retraining benefits, where the insurer will help pay for you to take an educational course to learn a new trade.

IP premiums are tax deductible, the money you receive is taxable income. When you do your tax return the insurance benefits are treated just as you would treat your regular wages.

Business Expenses Insurance (BEX)

Similar to an IP policy, but they pay for eligible business expenses. If your business suffers as a result of your illness, the insurer takes on certain business expenses such as payment of interest on your loans (not principal), staff wages, rent, insurance and costs of hiring a locum (a locum is a temporary replacement for the insured, and is someone brought in specially for the occasion, usually the locum cannot be an existing staff member or a relative). As a rule these policies do not pay for your own salary (take out an IP policy for that), depreciation, for the acquisition of goods or capital expenditure. BEX is supposed to keep your business ticking over until you are able to get back to running it, not to fund a grand expansion into a new market.

Most BEX policies only pay for up to one year, following which they expire.

Premiums are tax deductible, benefits are taxed.

Other things to consider

Ideally you want to get a guaranteed renewable policy. This means that so long as you passed the medical tests when you first applied for the policy, the insurer must keep your policy going as long as you pay premiums. This means that if you do make a trauma claim, which would often render you uninsurable if you wanted to apply for a new policy, you can keep your life cover going.

The opposite of guaranteed renewable is a reviewable policy. The insurer must pay out whatever benefit they have agreed to pay the first time it happens, but following that they reserve the right to send you off to a medical practitioner for some tests, and may refuse to allow you to renew your policy. If you are offered a very cheap policy, much cheaper than any other insurer, check the policy to see if it is reviewable. These policies aren't completely useless, you do after all get paid once, but they certainly aren't as good as guaranteed renewable policies. The other thing to check about a cheap policy is to have a look at the exemptions, if the policy does not cover you against injury while driving or while at work then clearly it isn't very useful.

So long as you answer the questionnaire truthfully to start with, later changes in your career and health will not affect your policy. You could decide to become a professional boxer a couple of years after taking out IP insurance and the policy would remain standing. The next section on good faith is valid though, you must not, at the time of going into the contract, have any intention of making this change. You can change your mind later, just don't enter into a contract with a plan to later get into hazardous activities.

Does the policy cover you 24 hours a day, worldwide? Sometimes policies only cover you at your job, during ordinary working hours. A 24hr/worldwide policy will cover you even if you fall off a ski lift in Switzerland. However do note that very few policies will pay you if your injuries come about as a result of an act of war or civil commotion.

Duty of Utmost Good Faith

This concept is embedded in legislation, and demands that both sides in an insurance contract act in a reasonable, honest and humane way toward each other. Believe it or not, this is actually consumer protection legislation. Previously insurers could get really picky and technical when assessing claims. If your insurance adviser mis-spelt your name on the application, insurers could get away with taking your premiums for all those years and then denying there existed a valid contract when you come to make a claim.

This legislation set out a set of more reasonable actions, and mostly stopped this practice from occurring. The concept that the court now looks at is that the omission by the insured in their application must be material to the insurance assessment. If the applicant fails to disclose a hereditary disease or past illness when making the application, the insurer will reassess the claim based on the info they now have to hand. If the insurer can demonstrate to the court that it has a pre-existing, enforced company policy relating to this condition, and if the insurer can demonstrate that if they had known about this earlier then the contract offered would have differed substantially or been declined, then the insurer can handle the case just as it would have been treated if the original application had been accurately filled in. This means that if you failed to disclose something to the insurer that would have made them decide differently when assessing your case, your claim will be assessed in light of the new info. If the non-disclosure was irrelevant, the insurer cannot use that as an excuse not to pay.

There are two kinds of non-disclosure. An innocent non-disclosure relates to failing to reveal something you didn't know about. This will lead to an individual consideration of your case, for example if you did not know about your brother's heart attack at age 34 then you could not declare it in the family history questionnaire for life insurance. If you did know about it, but wrote "good health" in the questionnaire about your brother, this will be a "fraudulent non-disclosure" and you will be at the mercy of the insurance assessors and the courts who probably will not be too sympathetic to your cause.

In the health questionnaire you should always declare everything you can think of, however trivial. The insurer won't decline you for life insurance just because you broke your arm in 1963, but it isn't a good idea to give the insurer a legal "free kick" by failing to disclose something that may be marginally important. Remember that the insurer does want to do business with you, the vast majority of applications are approved as presented. Just don't go giving them too much ammo to use against you at claim time by leaving out the details.

Level vs stepped premiums

As you get older, insurance gets more expensive. Naturally a life insurance policy on a 95 year-old should cost more than for a 20 year old as the chances of the former dieing are considerably greater. If you want long term cover extending over a great many years it may be cheaper to take out level premiums.

A stepped premium changes every year. With every passing birthday your insurance gets more expensive. If you graph the premiums payable for each age you will see it pretty much takes off exponentially as you get really old. On the other hand, for buying a new policy, stepped premiums are always cheaper to start with than a level premium.

A level premium is more expensive right now. You start off paying a fairly expensive rate, but apart from general increases in the cost and amount of insurance cover, the premium is more-or-less fixed as long as you hold the policy. A graph of a stepped vs level premium shows the level as a more or less flat line starting higher up than the stepped premium, but overtaken a decade or so down the track, when stepped premiums become hugely more expensive.

Level premiums are not as popular as they once were. There are a few reasons for this. Firstly, at first stepped premiums are a lot cheaper. It depends on what age you do the comparison, but level could well start out twice as expensive. Secondly, it is not usual for people to have the same insurance needs for ever. As your superannuation grows and your debts fall, as your children leave home and you settle down your insurance needs also diminish. A strategy to get around that would be to take out two life policies, one with stepped premiums and one with level. The stepped premiums will cover short term needs, you can cancel this policy when the kids do finally leave, the level premium will add enough to your superannuation that your spouse can live through retirement comfortably. A third reason for level premiums not being as popular as they once were relates to the time value of money.

Sure, if you add up the premiums you pay between now and 90 on a stepped vs level policy, the level comes out way ahead, but don't forget that today's dollars are more valuable than future dollars, both because of inflation and because you can always invest the money elsewhere. It might be argued that you could stick that extra premium money in a good share fund and by the time the breakeven point is reached the money will have grown substantially, and you will be more than capable of paying for expensive stepped life policies. Whether stepped, level, or a combination makes more sense for you is a complicated question, one that relates to the sort of investment returns you can expect for someone of your experience and risk tolerance, your present and planned insurance needs and your capability of paying more now for savings later. You should definitely talk to an adviser about this sort of thing.

Term insurance vs investment policies

Once, life insurance and investment products were one and the same thing. Whole-of-life insurance policies, which take a variety of forms, combine a managed fund with a life policy. The fund would grow in value, at the end of each year the policy would be awarded a bonus. The surrender value of the policy started out as zero, but when you want to stop an old whole-of-life policy you can actually sell it for some money, that is the sum total of bonuses, minus any unpaid premiums on the life policy.

As well as an investment, the policy could also be borrowed against, you would borrow money from the insurance company up to the value of the bonuses, paying a rate of interest on it. This was like surrendering the policy while still keeping it active... the penalty being the interest rates.

A nice feature of the investment policies is that after 10 years you pay no tax on the profits. The insurance company has already paid the tax, so essentially it carries its own franking credits. In the couple of years prior to the 10th anniversary the tax-paid status comes in on a sliding scale.

You hardly see whole-of-life being sold these days. There are various reasons for this.

Firstly, they are expensive. Term insurance is what people buy today, purely risk products with no savings component. They are less complicated, you pay a fee and for the time the policy is paid for the insurer agrees to pay a benefit if you make a valid claim. Go adding in investment and the whole business becomes administrationally complicated with various fees and bureaucratic complications there is always a drag on performance.

Secondly, returns have been pretty bad. Partly this has been because the insurers have been lousy fund managers but to a large extent it is because of the fees. The insurance adviser got a pretty hefty commission to start with, and while the insurer may hide this from you by not showing it as a direct fee on your policy, instead the commission is carried as a debt on the policy for many years, incurring interest of course, and being paid off only gradually over the life of the policy. You can partly see this fee in action by comparing your fund balance with the surrender value. The difference between them, often thousands of dollars represents the exit fee, which to a large extent is the salesman's commission. Insurance commissions even today are quite generous, but back in the 70s and 80s, when whole-of-life policies were still being sold en-masse, they were fantastic. The problem is only worsened by the conservative risk profiles adopted by many people choosing a policy for themselves. In the interest of "safety" they chose a capital guaranteed investment based to a large degree on bonds and cash investments. The poor returns on these investments over time, offset by the high fees has totally ruined any possibility that the policy could ever be a good investment, which is one reason why of late so many people have simply cancelled their policies and walked away in disgust, it was a case of throwing good money after bad.

Today, I would not myself take out a new whole-of-life policy, term insurance has overtaken whole-of-life and left it in the dust. On the other hand, buying very old whole-of-life policies can be a great investment.

There are secondary markets for investment insurance policies, like stocks at the exchange you can buy and sell WOL policies. The life cover is usually cancelled, improving investment results tremendously since the premiums aren't deducted for the life cover any more and it becomes a pure investment product. The policies that are in demand are often very old, usually older than 10 years, so by now they have "tax paid" status. You can be choosy, there are plenty of old policies to buy, and you can assess the performance of the insurance fund manager exactly the way you would with a conventional managed fund. The quality of fund managers has improved in the last few years, returns are picking up. In addition you can upgrade to a more growth oriented profile, so you get growth with the tax advantaged investment.

Over the last couple of years they have returned nearly 8%, not bad since you don't pay tax on them. This is particularly good for high income earners where the tax-free nature of the investment is of highest advantage - and for children, since children have very high tax rates for unearned income (to stop parents using their kids as a tax shelter, spreading out investments among their kids to incur multiple tax-free thresholds). What is more, while investment performance can fluctuate, the principal is at least guaranteed, the insurer can not reclaim the bonus payments once they have been awarded. What will they return over the next few years? Well probably less than the stock market, since at heart they are a market driven profit, but they won't lose any money. While there are faster growing investments to be found elsewhere, traded policies are pretty handy.