It’s important for advisers to help make insurance as affordable as possible for their clients, given the enormous benefits of cover. Renee Hancock writes.
Consumers are increasingly cost-conscious, and in the prevailing lower-growth, lower-return environment, that will only intensify.
When household finances are stretched, insurance can be one of the first items to go despite the vast benefits of cover including security, peace of mind and financial protection against unexpected injury, sickness and/or death.
But there are simple ways financial advisers can help make insurance more affordable to ensure clients don’t let their valuable cover lapse.
While the majority of advisers will already be familiar with the practical tips below, it’s useful to be reminded of what's available to them and their clients.
1. Refuse the annual increase for indexation
Most insurance policies include a built-in Indexation Benefit that increases the sum insured at renewal by the rate of the Consumer Price Index (CPI), subject to a specified minimum of up to five per cent. This benefit is designed to ensure that sums insured keep pace with inflation but it effectively means clients are buying more cover. This is on top of age-related increases for stepped premium.
However, clients can opt out of the annual CPI increase, which is an easy way to reduce the cost of their premium and may be suitable in the current low-inflationary environment. It’s important to check that opting out won’t affect a client’s ability to reinstate the Indexation Benefit in the future.
2. Hold insurance inside superannuation
People are increasingly holding life, TPD and/or income protection insurance inside superannuation, allowing them to cover the cost of their premiums from their pre-tax superannuation monies or via a rollover from another superannuation fund. For example, many individuals have cover inside an insurance-only super product and roll money over from their accumulation super fund to cover the premiums.
The downside is that premiums may eat away at a client’s retirement nest egg.
Furthermore, limitations exist when insurance is held inside super. Not all types of cover, benefits and options are available and a benefit can only be released if it meets a condition of release under superannuation regulation. There may also be tax consequences on TPD and life insurance payouts.
3. Put the cover on hold
A built-in benefit of many policies is the ability to suspend cover and premiums for up to 12 months (provided cover has been in-force for at least a year).
While the client is not covered for anything that happens to them during this period, if the client is experiencing a temporary cash flow problem, suspending cover is a much better option than letting it lapse or cancelling the policy because at the end of the suspension the client’s policy resumes with the same level of cover without the need to re-apply or go through the underwriting process again.
From an adviser’s perspective, it’s a more efficient solution given how difficult and complex it often is for them to secure cover in the first place.
The ability to suspend cover is one of many features built into insurance policies, which policyholders are entitled to take advantage of if they need to. Premium waivers are another example.
Premium waivers effectively give policyholders a break from paying premiums for a short period of time, for example, in the event of redundancy or unemployment, taking maternity leave or while a claim is being assessed. The added benefit of the premium waiver is they are still covered during that period.
4. Pay premiums annually
By paying premiums annually instead of monthly or quarterly, clients can reduce their premiums by up to eight per cent. Having said that, it isn’t an option for clients who want to cancel an existing policy due to cash flow problems.
If that’s the case, they should continue paying monthly even though it will cost more.
5. Check if a client has stopped smoking
Smokers can pay up to double the premium of non-smokers, which is why it’s important to check in with smoker clients to see if they’ve given up.
Individuals who have quit smoking voluntarily for at least 12 months are generally entitled to non-smoker rates.
This is an easy way for clients to save money and for advisers to demonstrate the value of an ongoing advice relationship.
On top of these options, there are other levers available to clients who may be struggling to meet their insurance premiums including: linked and flexi-linked cover rather than holding individual standalone policies; reducing the sum insured of their full cover and topping up with accident-only cover; and exercising an option offered by some insurers that fixes the premium in exchange for a reduced amount of cover each year.
Naturally any change would need to be fully communicated with your client as many of these options involve reducing the sum insured or the quality of cover, but if it comes to the point where your client is going to cancel their valuable cover or let it lapse, these may be options worth discussing.
Renee Hancock is head of product at ClearView.
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