Is mortgage protection ‘junk’ insurance?

The insurance policies in question – administered by ALI Group through an Aussie partnership that has been in place since 2013 (and now underwritten by Zurich Australia Limited) – claim to provide protection for a wide of “critical life events” across three areas: trauma, death and terminal illness, and specified injury.

However, it is alleged by the class action specialists that people who were sold a policy were sold a product that was “of low or very limited value to them”.

Kione Johnson, Shine Lawyers’ class actions practice leader, stated the claim will allege that mortgage holders were “sold a junk policy”.

“The policy promised mortgage holders assistance for home loan repayments in the event of illness or injury, loss of employment or death,” Johnson added.

“We allege it was an unnecessary expense given most customers may have already held life insurance policies that offered them this security and coverage, and/or because Aussie’s policy only provided cover in a limited range of circumstances.”

Following the news, several members of the industry reached out to The Adviser to outline their beliefs that the insurance has its place in the market.

Lawry Miller, a broker at Education Healthcare Mortgage & Finance and Community Builders Mortgage & Finance (and former life insurance adviser), told The Adviser that he had previously sold mortgage protection (albeit not an ALI Group product), and – while he believed the older generation of products may have been “poorly designed and expensive” – they were “not “junk”.

Miller, who undertook a deep dive into life insurance in Australia as part of an MBA assignment, said he was “just horrified as to the misunderstanding of the place of life risk in Australia”.

According to Australia’s Life Underinsurance Report, commissioned by the Financial Services Council in 2022, it is estimated that 1 million Australians are underinsured for death and total and permanent disability (TPD) insurance and 3.4 million people underinsured for income protection insurance.

“Australians are horribly underinsured, it was bad before the [banking] royal commission and it is now terrible, with the [insurance] industry on the verge of collapse,” Miller told The Adviser.

He added that he believed the banking royal commission had exacerbated the issue by creating “an environment of complete avoidance of responsibility in Australian society concerning protecting family and themselves and society from the fallout of death, disability and redundancy”.

He added: “[A]spirationally, it was a great product for clients who would refuse life cover…

“I can guarantee that every client who ever claimed on a [mortgage protection] policy didn’t complain when they got a payout.”

ALI Group’s mortgage protection insurance policies – which continue to be offered to Australian home buyers through authorised mortgage brokers from a range of aggregators – reportedly provide benefit payment on death, terminal illness, specified trauma conditions, and other claim situations, dependent on the policy.

Speaking to The Adviser, ALI Group chief executive Emily Sofkovska said the company would “vigorously defend [the] class action lawsuit commenced by Shine Lawyers”.

According to Sofkovska, My Protection Plan has helped protect over 230,000 policyholders in co-operation with authorised representatives since its inception in 2003, adding that benefits of over $168 million have been paid to policy owners (or their estate or beneficiaries) at times when the unexpected has occurred.

“Australians are underinsured,” she said, highlighting the FSC research, “so our purpose is to help consumers understand their insurance options and gain sufficient cover for their individual needs.

“ALI Group policies have been designed specifically for Australian home and property buyers to consider when taking a new loan, refinancing an existing loan, or reviewing their current loan…

“ALI Group’s product can be offered to all Australian home and property buyers who meet the eligibility requirements.

“In many cases, our policyholders are first-time home buyers who are seeking to provide for their family while taking on significant liability. That’s a good time to stop and consider whether they have adequate risk mitigation for unforeseen developments.”

The ALI Group CEO told The Adviser that many claimants have actually previously expressed their gratitude to ALI and their mortgage broker for offering the policy.

Moreover, she noted that the company had only received 51 formal policyholder complaints through the Australian Financial Complaints Authority (AFCA). None of these have been found in favour of the complainant, according to AFCA’s Datacube.

A people issue?

The Shine Lawyers class action also alleges that brokers “breached their duties to their clients” by selling the product, including by “not acting in their best interests” (a legal duty that came into being on 1 January 2021) and “failing to give appropriate advice”, among other allegations.

Miller outlined that this therefore focused on “a people issue, not a product issue”.

Speaking of his time writing mortgage protection insurance himself, he said that his conversations “never strayed into advice” as “it was always around encouraging the client making an informed decision after a conversation with an [insurance] consultant”.

Sofkovska said brokers are also trained and would “continue to receive ongoing education and training support from their experienced BDMs, and direct access to [ALI Group’s] knowledgeable customer service team”.

“Our high-quality broker onboarding process, continuous investment in education and business and compliance reviews [ensure] our authorised representatives are confident in having a risk conversation with their customers,” she continued.

The ALI Group CEO added that brokers were “vital to ALI Group” and in helping the company “ensure Australians get the cover they need to help them if the unexpected occurs.”

Miller stated: “I hope the industry gets behind Aussie in fighting back against what I see as an ingenious money grab by the lawyers.”

Peter Fez, a Western Australia-based broker at Aussie Home Loans, agreed, commenting that he believed the claim was “baseless” and “appears to be more about greed rather than a legitimate claim against ALI or Aussie”.

What do you think about mortgage protection insurance and its role in protecting borrowers? Let us know in the comments below