Any pay anything, it seems. Australians now fork out more than $44 billion a year in premiums for life insurance policies, including for death, total and permanent disability and income protection. The scandal is – sorry – one of the scandals of life insurance is that many Aussies don't even know they're doing it. About 70 per cent of life insurance policies are purchased through superannuation funds, with premiums deducted from super balances every month. Of course, if you read your super statements, you'd know this.

But many don't. It is not uncommon for young people to be completely unaware that, from their very first job, they have had insurance premiums deducted. They have the option to opt out, but most don't. There were very good, if paternalistic, reasons why the system was set up this way. In times gone by, super funds were able to secure large premium discounts for members by exploiting group purchasing power. By getting young people into life insurance early, this also reduces their chances of being excluded from cover later on due to a pre-existing medical condition.

For two decades, Aussies have been buying life insurance without even knowing it. Worse still, there are now about 14 million duplicate super accounts, meaning potentially millions of Aussies are paying for multiple insurance policies on which they will only be able to claim from one. According to Choice, Australians waste $1.96 billion a year this way. An inquiry by the Productivity Commission is currently considering whether super funds may be breaching their duty to act in customer's best interests by signing 18-year-olds up to life insurance products that do not suit their needs. A separate working group is considering whether life insurance policies through super should be opt-in until the age of 30.

But the more distressing problems with Australia's life insurance industry lie at the other end, when people come to make a claim. Life insurance claims have increased markedly in the past half decade, partly because many Aussies are waking up to the fact they have cover. In response, many life insurers have become explicitly focused on trying to reduce claim payouts. Indeed, insurance companies are even paying money to super funds whose members have low claim rates. Before a parliamentary committee hearing last Friday, the managing director of financial planning and products firm ClearView Wealth, Simon Swanson, labelled these payments "bribes". Super funds counter that this money is simply a way of giving money back to fund members. But it smacks of kickbacks.

To make a life insurance claim through super, policy holders must jump through not only the paper hoops of their insurer, but also their super fund. Many give up and walk away empty handed. The catalogue of horror stories from the life insurance sector of sick and dying people having their claims denied is now long, and well documented, thanks to the fine efforts of my colleague Adele Ferguson and others. Speaking before the inquiry on Friday, the Public Interest Advocacy Centre added another worrying case of a man with cancer who had his income protection claim denied on the grounds that he sought counselling for a relationship breakdown a few years prior and failed to declare it when purchasing his insurance product. When asked, "Have you ever been diagnosed with, or ever had symptoms of, any mental health disorder?" the man answered no. But upon making his claim, the insurance company delved into his medical records and found notes from his medical practitioner stating he had been "feeling low". Potentially now anyone who has ever mentioned to their GP that they're feeling a bit stressed or a bit down may have voided their insurance policies.

About one in five Aussies suffer symptoms of a mental disorder each year. And only one third seek help. And we wonder why. Australians are being comprehensively failed by insurers, regulators and politicians when it comes to their purchases of life insurance products. In other evidence to the inquiry, John Mannon of the Australian Lawyers Association detailed the case of a NSW police officer who was subject to intrusive surveillance by her insurer, Metlife, after she was unable to continue her work as a police officer because of the trauma caused by having to watch hours and hours of footage of abuse of minors. The insurer's response? To film her – and her children – as they went about their daily activities to see if she was really unfit to work.

Misaligned incentives. Waste. Duplication. Predatory behaviour. Not to mention emotional distress and humiliation for people at the most vulnerable times in their lives. It's an outrage and reform is sorely needed. Sadly, recent legal changes have made things worse, increasing the burden of proof for a total and permanent disability claim to being "unable" to work, rather than "unlikely". Policy makers need to answer why it is that life insurance is the only product carved out of consumer protections around "unfair contracts"? Life insurance now appears little more than a costly gamble on protection that for many will never pay off, when it should be an important protection for the most vulnerable period of our lives.

Bad behaviour highlighted in the industry is leading to higher claims and to fewer people purchasing products, which only accelerates a death spiral for the industry. If it continues, the burden of caring for bereaved family members will ultimately fall back to the state. Given the alternative treatment they're receiving in the private sector, that may be no bad thing. The committee will report its recommendations by June 30. It can't come soon enough.