Insurance advice could look quite different if the overall goal is to be covered for a period of time, rather than what the ideal sums insured are for today. This article will consider why advice needs to look beyond year one and ways to go about tailoring strategies to make insurance affordable for the long term.
Minimise excessive and overlapping cover
1. Excess cover
ASIC has raised concerns about the methods used by many advisers to calculate sums insured, particularly generic calculators. Its view is that the calculator cannot balance the client’s priorities or take into account their changing needs over time.
Analysing the client’s actual needs through conversation may produce a sum insured that is lower than that produced through a calculator, as there may be calculation assumptions that are not relevant to that client, for example, the length of time a child will be in private education.
2. Overlapping cover
Calculators will also often view different types of cover in isolation. Producing a comprehensive insurance solution, where a particular policy is tailored to work in conjunction with other policies can reduce the cost. Instead of covering full income within a total permanent disability (TPD) or trauma policy, only the remaining 25 per cent of income that is not covered in an income protection policy could be covered. Further, as proceeds from personally owned lump sum policies are received tax-free, cover for only 25 per cent of net income is required.
Reduce cover as needs decrease
While the sum insured for many insurance policies will be indexed, this may not be in line with the client’s requirements. For example, it is likely that debt will reduce over time as repayments are made. So, for the portion of cover aimed at extinguishing debt, it is unnecessary to increase cover over time, but rather to reduce cover to a level aligned with the debt balance at that time.
This also applies to child education costs. The number of years in which education costs need to be covered will reduce as the children age.
Align premium structure to short-term and long-term needs
Once the appropriate amount of cover has been established, the adviser can align the time period for particular needs, to the premium structure. This is because stepped premiums are cheaper over a short time frame compared to level premiums.
Generally, short-term needs align with stepped premiums and long-term needs may call for level premiums. For example, where children are close to finishing private education or becoming financially dependent, this portion of cover can be eliminated in the near future, so total stepped premiums would be less than total level premiums.
If removing debt is a reason for obtaining cover, the client’s need is long term, even if the sum insured is reduced upon review. Structuring this portion of cover under a level premium structure may mean that total level premiums are less than total stepped premiums. Cover for a mortgage, final expenses and top-up income are also long-term needs and can therefore be structured under a level premium structure.
Adding value
There is enormous value in personal insurance advice. Surveys continue to find that those who seek advice have much more adequate cover than those who go it alone.
Personal advice is just that – personal. It needs to be tailored to the client and their relevant circumstances and needs, instead of solely relying on generic calculations. Taking the time to ask particular questions can uncover important information. For example, in the event of a partner’s death, would the client sell the family home and move back with their parents? The client’s answer might have an impact on the sum insured.
Ensuring that advice balances the client’s needs today and tomorrow will help maintain the affordability and relevance of cover, thus promoting retention of life insurance policies. Furthermore, having a thorough understanding of the client’s situation can strengthen your relationship with the client.
Rachel Leong, product technical manager, life insurance, BT
Sorry Rachel but I cannot let your article go by without a few shots
If ASIC has concerns about some insurance calculators in
software used by advisers then let them pursue the software providers, who
generally hold AFSLs. At the same time clean up the calculators that appear on
the internet, particularly the ones on industry super funds sites.
You suggest the preferred method is through conversation with the client to which we’d all agree except that if LIF (pursued by the four big banks) proceeds to its
three-year finale there won’t be many advisers around to hold those
conversations, or being paid enough to be able to devote time to those
conversations. And those conversations are certainly never available to
consumers on any of the TV direct websites or under the banks preferred model
of Robo advice. I agree with your comments on covering the 25% of income missed
on an IP claim, but it must be own occupation TPD
Are you seriously suggesting we recommend lump sum cover and not tick the indexation box. People’s lives change, families split up and new houses are purchased every 7 ½ years. Isn’t it better to include the indexation and let the client decide each year to refuse the indexation as circumstances dictate, or even reduce sum assureds. However I agree with your comments on education costs but there is an underlying assumption that the child will always attend that particular school.The surviving parent following a death claim may have different ideas and choose a more expensive school for that child particularly if the death benefit allows for the surviving parent to make a choice.
Most advisers understand stepped versus level premium andrecommend structure accordingly. But I have found there is only one insurer who will allow one death policy for a level premium and another death component for a stepped premium in the one policy, on the one policy fee. Let’s have insurers to the front please because believe me, consumers hate policy fees when they are thrust in front of them in a quote.