Managing life insurance affordability

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.

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Rachel Leong, product technical manager, life insurance, BT