The industry ombudsman has sided with Zurich in a dispute over stepped premium rises, ruling the complainants misunderstood their policy.

A couple identified as Mr and Mrs K bought life insurance in 2005 through an adviser, covering Mr K’s mother.

They said it was their understanding the policy would expire when she turned 80 and provide a benefit.

The Australian Financial Complaints Authority says the couple “appear to have fundamentally misunderstood how the policy works. The policy is not an investment-type policy, which pays an amount after [Mr K’s mother] reaches a certain age or the policy expires. The policy only pays a benefit if [Mr K’s mother] died while she had cover under the policy.”

AFCA says stepped premiums go up every year as the insured gets older and their risk of death increases.

The ombudsman has also dismissed other allegations made against Zurich.

The couple said the insurer changed the policy to have no expiry date without their consent; failed to give premium projections; and failed to give financial hardship help or financial advice, or to refer them for financial advice. 

Evidence provided by Zurich, including recordings of five phone calls with the complainants, showed the insurer handled their questions appropriately between 2020 and 2023.

The couple called the insurer in August 2020 about their struggle affording the premiums, and the insurer responded, including by providing quotes and premium projections on request, providing options to reduce the premiums, and providing a one-month premium waiver.

The policyholders said the offer of a premium reduction did not benefit them because it meant the sum insured would be lowered.

AFCA says: “Stepped premiums are a fundamental feature of the complainants’ policy. The complainants would have preferred for the insurer to reduce the premium without reducing the sum insured, but the insurer had no obligation to offer that, even though they were in financial hardship.

“Reducing the sum insured is an effective and enduring way to reduce the premium that would otherwise be payable on a policy. It was appropriate for the insurer to offer a reduction to the sum insured. The complainants say it would have had no benefit for them, but that is not true: it would have made it easier for the complainants to retain some level of cover.”

AFCA says the insurer changed the policy expiry date, which meant the couple could cover Mr K’s mother for longer if they wanted to.

“The complainants could have chosen to let the policy lapse at any time, including at the original expiry date of the policy. Accordingly, the extension of the expiry date did not disadvantage the complainants.

Click here for the ruling.