In fact, there are many other levers that need to be pulled, including the affordability of life insurance premiums for consumers, the perceived issue of churning and the issue of misaligned incentives. Another is the impact of Australia’s love affair with yearly renewable term (YRT) insurance.
The trouble with YRT is it’s written on the presumption that it will not be in force at claims time. That is to say, the only people who will have YRT policies in force at claims time are those who are seriously ill. This is because YRT by nature has very low premiums when first put in place, but as time goes on and clients age, premiums increase to the point where it is uneconomical for most people to keep policies going and so they lapse. This means that at the very time when a claim is more likely to occur, most people do not have a policy in place.
The challenge is that the alternative is no less affordable. Premiums on level premium policies are generally around 250 per cent more expensive than premiums on YRT policies.
It usually takes about five years before the cost of a YRT premium approximates that of a level premium and then another four or so years to make up the cost differential. This means it takes eight to 10 years to reach the equilibrium point and most people just won’t stay the distance. So as an industry, our love affair with YRT is reinforced.
Because YRT policies are re-costed every year in line with the life insured’s age, and premiums are always increased, it is very easy for an adviser to move a client from one policy to another. It’s all but impossible to move a client from a level term policy, because level term policies are designed to be affordable right through to potential claim time. Premiums on level policies relate to the client’s age at the time they move, while premiums on the existing policy relate to the client’s age when the policy was first put in place – that is when they were younger.
When Synchron’s independent chair, Michael Harrison, and I went to the UK earlier this year, one of the things we identified was that YRT is virtually non-existent. One of the reasons for this is that 70 per cent of all life insurance in the UK is written off the back of mortgages and is designed to pay in line with mortgage payment terms. There is a defined period of cover, which is 25 years to age 65 or 35 years, depending on the term of the mortgage.
There is no reason why in Australia we should not adopt a similar approach to the UK and look closer at set term life insurance that is structured and designed to sit comfortably within the lifestyle of the consumer. A level term policy with a pre-defined term is affordable and is more likely to be in place at time of claim than one that increases every year to the point where it is uneconomical for a client to pay the premiums.
As noted, following our visit to the UK, we identified all the levers that we believe need to be pulled in the current debate around life insurance – the affordability of life insurance premiums, the so-called issue of churning, adviser remuneration and the impact of Australia’s love affair with YRT.
We believe a properly structured level term insurance product, incorporating an intelligent adviser remuneration structure can appropriately address them all.
Don Trapnell is a director of Synchron.
I agree to a point Christoph, however Level premiums for a 30 year old are not double that of stepped and generally you are taking the view point that the risk is greater in the future, and hence the need for affordable cover in the future is greater so I will prepay some of the premium in my younger years instead of the later years. I am in my 30’s and have taken that view point. I also took the view point that I am reasonably healthy now and as such I will guarantee some of the my insurance for tomorrow, priced in my best health. Level premiums make sense for younger clients as it is more affordable to take the pain today rather than tomorrow.
“There is a defined period of cover, which is 25 years to age 65 or 35 years, depending on the term of the mortgage.”
I spent some time looking for the average duration of a mortgage. The so-called 100% PSA (Public Securities Association), a standard measure of mortgage duration assumes that half the debt of a 30-year mortgage pool has been repaid early after about 13 years. http://www.yieldcurve.com/Mktr…
In other words, many mortgages get repaid early – what are the consequences of this early repayment for the insurance?
Personally I wonder about the “cancelling at the time where the most claims are happening” argument. When you own your own home and have money in super (like many insured mid-50s people), getting cancer or passing away is far less devastating from a financial point of view than when you are in your 30s and bring up a young family.
Level premiums mean that the person in their 30s is only insured for half of what they would be on stepped premiums if they insure themselves for the maximum premium they can afford, yet that is the time where getting $100k vs $200k (trauma) or a $1 million vs $2 million (life) claim payment makes the biggest difference.