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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.

« What will a 20 minute bank insurance product sale cost youIt's time for advisers to lead »

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Comments from our readers

On 10 April 2012 at 7:27 pm James said:
I had, what I thought, was completely adequate cover (more than the numbers listed here) on my wife when she passed away, quite unexpectedly.

We hadn't reviewed it for quite some time, life got away, a renovation and more debt was not included and while I'm debt free, it's difficult juggling work and two young children.

I wanted to do the same things with the kids planned before she died. The debts cleared and things look nice on paper but income falls when you're self employed and juggling kids so now I'm in a situation where I have to choose what to cut back.

Not what was planned.

Remember your job is important.
On 13 April 2012 at 9:17 am GS said:
I think James' point is very interesting. For me, the idea of an industry minimum standard regarding levels of cover is a good one - but I don't think that can fall under 'advice'. Sure, a customer could come along and choose the standard minimum, but I think it needs to be customer led with sufficient info for them to make an informed decision. Anything above that, or comment on the suitability of the minimum would then be advice. As James suggests, the value of advice is high - we'd need to make sure that a minimum amount being available didn't turn the exercise into an order taking, box ticking process.
On 13 April 2012 at 1:19 pm VEPA said:
How Much Life Insurance Is Enough? that is the question that needs to be answered every time a broker sits down with a prospect.There must still be a lot of policy peddlers out there if Russell's statement is correct. The idea of selling five times or 10 times the annual income is not a very accurate method of establishing just how much life and TPD insurance is enough. The sum of life insurance required should be rated to the amount of income that the family would need in the event of the death or TPDed of the individual. It is not hard to calculate if you establish a capital sum invested at a particular interest rate. However there is more than that required when establishing a persons insurance requirements. 50 years ago when I came into the life insurance industry we were trained how to establish a person's/families needs for insurance. We never had the tools that are available today and that was particularly frustrating at that time.
On 13 April 2012 at 3:32 pm Charles said:
Agree with VEPA - any rule of thumb will essentially be a "sales only" approach to helping manage the risk needs of families and organisations.

Salary multipliers can be useful; even better is consideration of obligations (liabilities) and adverse situations (stress tests).
On 14 April 2012 at 9:56 am Tony McCombs said:
Thanks for another thought provoking article Russell & to James for sharing his experience.

When I fell 3.5 metres 2 years ago the thought just before I hit the ground was "at least my family are going to be OK."

Quite a good test for my insurance - but not one I would recommend to test whether a person has the right cover :-)

Life insurance is a form of protecting income if a person dies or becomes terminally ill... but I agree with Russell that advisers (yes I am one) should help clients tailor a plan that includes income protection, after discussing all the risks weighing up budget & benefits.
On 15 April 2012 at 6:41 pm Mark Ogden said:
I think Russell's point is spot on.

Ideal world may be affordable today but if the needs are the same in 5 or 10 years time, possibly no longer affordable anyway. Less level cover may be better today(or a mix).

I believe the industry focus is the wrong way around and feel compliance can make advisers look at butt covering before logic. Anyone can follow a needs analysis to give an ideal amount of life insurance(nothing new), however, it takes skill to show a client that this is "ideal world" stuff and with a risk of 0.2%< for 40 year olds, isn't it better to forgo some life/trauma insurance to cover a bigger risk of being off work thru disability.

It's about the client retaining some of the risk to afford cover for a more likely risk/events. Easy to justify.

It isn't just about needs analysis, but about discussing the different risks, leading clients to reasonable cover considering their budget now and long-term.

Obviously if budget isn't a consideration (I haven't met many for whom it isn't) go with ideal world.




On 18 April 2012 at 10:26 am Dean Kaye said:
It can be said of insurance that those that can't afford it need it most. I disagree with a prescriptive minimum Life insurance. Why, as I've yet to come across a client that has the same needs and or priorities as the next. What we need overcome is the 'she'll be right' attitude when dealing with our future health. Unfortunately, we can't fix this in the back of the shed with some no.8 fencing wire. Focus on educating client's, who in turn make informed decisions. Give advice don't sell, a prescriptive figure is a used car salesman attitude to insurance. As for a social norm, that should be to encourage obtain all to obtain advice from a broker who's not tied to one insurer and avoid the bank's do you want fries with that one shoe fit's all attitude.
On 20 April 2012 at 2:16 pm Amused said:
Well said Dean. I agree with your comments 100 percent.
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