Time to promote a new social norm for life insurance
Russell Hutchinson argues advisers need to adopt a new "normal" for life insurance cover, rather than just selling the most expensive policy.
Tuesday, April 10th 2012, 6:49AM 8 Comments
by Russell Hutchinson
Quotemonster has a rolling average of the life sum insured shown on the homepage - the sum will be no surprise to advisers, it is after all, the average: usually it varies between a figure in the high 300,000s to a bit over half a million.
Strip out the level premium quotes or take a look at the modal average (that's the sum most frequently chosen, as opposed to the mean) and it sits at $500,000 even.
So far, so normal, but let's complete the picture by comparing what's quoted with what's bought.
Life companies report that the most common sum insured on applications is just $200,000.
Surveys put the ownership of income protection at between 15% and 20%. Ouch. Those two figures indicate a big problem.
Not only is the largest catastrophic risk - death of a major income earner - getting a pretty low level of protection, but the most probable risk - disablement preventing work - is getting even less.
I proposed once that less life cover should be bought to allow the purchase of some income protection - but how much less would you sell?
Sacrificing $100,000 of life cover, fully 50% of the total would create very little room for even the skinniest of income covers.
There's only one thing for it: get consumers to buy more.
But when we talk to consumers we're often talking about ideals. Some talk of 10 times income. What income protection gets quoted is overwhelmingly for Rolls Royce cover: to age 65, on short waiting periods, aiming for the highest possible levels of income replacement.
This is a great message for most people, but it might be scaring some off.
We should complement the picture of the ‘ideal' with the picture of the ‘minimum'. The personal insurance equivalent of ‘third-party, fire, and theft'.
Ideally we'd get the new Financial Services Council and insurers to get behind the idea of "at the very least you need..."
The answer to that question would undoubtedly be hotly debated, but I'm prepared to have a stab.
It should be five years income in life cover, one year's income in TPD and Trauma, and 50% replacement income on a two year benefit. Of course, the average consumer should buy more. But it's a minimum.
Consumers respond to social norms. We now have a social norm of contributing to KiwiSaver.
Our industry should promote a social norm of a minimum balanced portfolio of cover.
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