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5 things wrong with bank sold life insurance

Russell Hutchinson looks at life policies sold by banks and explains five reasons why adviser-sold products are better.

Thursday, June 20th 2013, 12:44PM 13 Comments

by Russell Hutchinson

A lot of New Zealanders are sold their first insurance policy by their bank. It is good to have cover where none was before, and a big attraction for many of these clients was convenience: they usually filled in short forms and got cover without medical tests or exams.

But the trade-off is generally more limited cover and an opportunity to improve on it if they take the time to get good advice and submit to more extensive underwriting. Here are the main issues:

  1. Pricing. Not all bank cover is cheaper. In fact according to the Consumer magazine survey every single bank life cover offer could be bettered by a product sold by advisers. So much for the cost savings of direct. In some respects this is inevitable: pricing reflects how extensive underwriting is, and most bank cover is designed to be easy to apply for.
  2. Exclusions. Only ASB’s and Westpac’s cover is the equal of intermediated products – the others all include additional exclusions, most of which have long been erased from the products you sell. These extra exclusions include the ambiguous exclusion for participation in an unlawful act, which causes advisers to speculate on the treatment of a client killed while drink-driving, for example.
  3. Increasing Cover Options. Special events increase in cover options can allow clients to as much as double their sum insured without medical evidence based on common family, work, and financial events. Provided they, or you, remember to take advantage of the features. ASB is the only bank product to have a special events increase option as good as most advised products. Kiwibank’s is a runner up. Of course you can improve on both of them if you are very fussy about SEOs, but an honourable mention must be made of KiwiBank’s high maximum age to exercise the option – higher than many advised products, so check the exercise age limits on yours – they can cut out clients as young as age 50.
  4. Upgrade policy wordings. Five out of eight advised companies commit to upgrades in their policies. Only one out of five bank products do the same – that’s ASB again.
  5. More features: As insurers that distribute through advisers have had to continually fight to find a way to get your attention they have added many features that you may not find present in bank products – take the commitment to pay financial planning and legal costs for example.

That list is just life cover. Income protection and Trauma policies yield even sharper differences, of course.

« The Top Five things that aren’t done often enough when reviewing insuranceWhat makes good insurance? »

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Comments from our readers

On 20 June 2013 at 1:24 pm exAMPer said:
I think you need to remember that bancassurance (for wont of a better term) reaches people who wouldn't DREAM of dealing with a financial adviser. And many of these people are people whom advisers wouldn't dream of dealing with, either (due to very low net worth and likelihood of upsell). So in that respect, banks have a very valid role to play in the insurance market. No, the policies may not offer all the bells and whistles of a traditional insurer's policy, but getting people insured is the first step. Working for a bank as an underwriter is one of the most challenging things I have ever done in my career and it's certainly given me a healthy respect for this side of the industry.
On 20 June 2013 at 2:05 pm Zak said:
Great overview however one more to add to the list... who do you want managing your claim? Your adviser or a faceless employee who works for Bank? Refer below.

An Invercargill financial adviser and a Christchurch solicitor who offered their services free to terminally ill Bluff woman Meg Bourke have reached a settlement with BNZ Life Insurance Ltd.

Mrs Bourke was diagnosed with ovarian cancer last year and said she had spent much of her time battling with her life insurance provider instead of spending precious time with her family.

The insurance provider refused to pay Mrs Bourke her full life insurance cover because she had suffered from "depression" despite her saying she had never been diagnosed with the condition.
On 20 June 2013 at 4:04 pm JB said:
"Who do I want managing my claim?"
Actually, I would want a well-capitalised insurance company who puts their customers rather than advisers first. As long as they can offer that, I don't care if it's a bank or not.

You have quoted one recent example from the media which I agree was a poor decision. However, there are have been plenty of similar examples in recent years from many insurers, not just banks.

In my experience, bancassurers offer affordable cover (as they don't have to pay huge upfront commissions to advisers), efficient processes and a customer-centric approach to managing claims. Personally, I would value those far higher than some of the features mentioned in this article.
[Edited]
On 21 June 2013 at 10:47 am Ron Flood said:
JB, having read your comments I have come to the following conclusions.
Either 1. You work for a bank. 2.You believe everything Michael Naylor
says about upfront commissions. or 3.You are an uninformed critic who
has decided to put their spoke in.

I qualify these comments by first saying that I believe bancassurance comes
in two forms, firstly banks that offer polices underwritten by main stream
insurance companies such as Sovereign and One Path.

The second form is insurance companies owned and named after their brand.
This includes BNZ, Westpac and Kiwi Bank.

Now for the facts. I list below premium comparisons for 3 companies who are
presently amoungst the highest 'up front commission' companies and compare
the cost of cover to their client's compared to the banks.

Male non smoker aged 45 $500,000 life cover

Company A (210% comm.) $62.28 mth
Company B (200% comm.) $64.95 mth
Company C (180% comm.) $64.75 mth

Bank A (Own Company) $66.78 mth
Bank B (Own Company) $63.87 mth

One of the banks above has a clause in their life policy that voids a
claim due to "the insured's involvement in an unlawful act whether or not the
insured is charged or convicted of an offence in respect of that act;".

This particular bank has a very large book of life insurance clients and
I can't see, how as a QFE, they can be 'acting in the client's' interest when
their staff replace existing life polices on their client's.

The commissions paid by the insurers enable clients to get access to qualified,
experienced advisers who can share their experiences about real clients and real
claims when deciding what cover is required and for what reasons. I believe that
this skill set is seldomly replicated within the banking system.

Lastly JB, on the above evidence regarding premiums, who is getting the 'up front
commission' from the bank premiums. You guessed it, the staff who have targets and
bonuses directly related to the amount of business they have produced.

On 21 June 2013 at 2:53 pm JB said:
Ron,

I think you missed my point. I didn't say that bancassurers were the cheapest, just that they were affordable.

Although since you're so keen on the facts, you've missed out one of the banks out on your list. They charge $60.17 for a 45 year old male non-smoker for $500k and they don't have that clause you mention with regard to voiding a life claim for an 'unlawful act'. They also have a very strong insurer financial strength rating, backed up by solid profit metrics (whether on an accounting or margin on services basis) and strong domestic capitalisation based on the RBNZ life solvency standard basis.

So in answer to your first question, no I'm not an uninformed critic. Are you?
On 21 June 2013 at 5:12 pm Giles Thorman said:
JB I was going to let your smug initial post go, but now I cannot. You initialy stated in the event of a claim you wanted a well capitilised Insurance Company who put its clients before the adviser; you have lost me there. Just what point are you actually making??

You quite rightly point out that many Insurance Companies make mistakes at claim time not just the Bancassurers; the point being made by Zak was who did one want handling their claim an adviser who is not employed by the Insurer or someone whose salary is paid by the company potentially paying the claim?

Then you go on to make the outlandish claim that Bancassurers can offer affordable cover because they do not pay "huge up front commissions to advisers".

So all these philanthropic bank employees are not paid salaries? They are not housed in very expensive offices normally in the CBD of whatever locality you care to name?

I will not get into any debate about their efficient processes of these Bancassurers as I am not exactly sure whom you are comparing them against.

I thought Ron Flood made some valid points that Bancassurers were not any cheaper and some had clauses any self respecting broker would never allow a client to have.

I would add that the initial remark by 'exAMPer' that Bancassurers fill a very good place in the market is very valid. However to somehow claim they are superior to other insurance companies because they do not pay commission I find just a tad offensive. You do not find me saying anyone being paid a salary by the Insurance Company offering the contract cannot possibly work for the best interest of the client do you?

Finally your response to Ron is so smug it is almost amusing.
On 21 June 2013 at 9:57 pm Ron Flood said:
JB, I didn't miss the point. You specifically stated that you have found bancassurance was more affordable "as they don't have to pay huge upfront commissions to advisers"

You then proceed to bring to my attention to cover offered by a bank not listed in my example costing $60.17 monthly.
This cover is a staggering $2.11 cheaper per month than cover with an insurer paying 210% commission. What a great example of more "affordable cover".

I am of the firm belief that many bank insurance clients would be far better served by severing their ties to their bank insurance and seeking out a competent experienced insurance adviser.

By taking such action, client's would have their situations fully analysed and get the correct amount of cover for their given situation.

They would achieve a much better result than responding to a poorly presented and amateurish A4 sheet of paper stuck in front of the tellers box stating "see how much cover you can get for $5 per week".
On 22 June 2013 at 9:09 pm Yossarian said:
Bank products might offer what seem to be "reasonable" premiums but when you consider the benefits they provide they generally represent poor value of money. Worst of all, clients who buy their insurance from anyone unable to offer a range of different product providers (whether because they are employees or otherwise contractually or emotionally tied by relationship, habit or anything else) simply cannot give their clients proper advice.
On 26 June 2013 at 9:06 pm Zak said:
Giles thanks for putting my comments in context to JB. As you indicate my intention was to point out that at claim time most Advisers in our industry advocate for their client’s best interests. This is not to say that Banks don’t but rather who will have the client’s best interests at heart and do this best?
In our business we manage all client claims other than simple medical procedures for the simple reason we sold them a promise of financial support we want this delivered quickly with no stress to our clients. We are not influenced or moderated in our approach to this based on commission paid in the past or present.
JB it seems logical to assume that claims managers in all underwriters ‘bank or not’ operate to KPI’s set to ensure their employer’s best interests are maintained. If not how do you explain the treatment of the lady from Invercargill? The job of the adviser is to add weight and influence to the client in the claims process.
In my experience clients are not typically well placed to manage this process as they are emotionally overwhelmed with their illness and do not understand clearly what they are entitled to. In grey areas of policy wording or claims protocols they might accept a claim managers explanation for decline or a reduced settlement -good Advisers will not ‘refer the BNZ example’.
For me receiving commission from a sale brings an added burden to ensure the client successfully completes a claim when needed. In our industry you are only as good as your last claim…
On 24 September 2018 at 2:33 pm neelsv said:
I am interested to learn more about the wording of some bank policies( life cover), where the insured was killed in a motor accident while over the legal limit ( alcohol).The bank declined the life cover claim and my understanding is the reason for declining the claim is the wording in the policy " where the insured dies as a result of an unlawful act". I have been an Insurance adviser since 1981 and this "exclusion" is far fetched and worries me. This happened to the (late) husband of a female family friend , whose husband died about 7 months ago in a motor accident. If anybody has any knowledge about similar claims I would like to hear from you?
On 24 September 2018 at 6:35 pm Dirty Harry said:
JB is just plain wrong. I can’t work out though if they believe that pious trite rubbish about "not on a salary" or if they are trolling us to laugh at our indignation.

Bankass is not cheaper. End of story. Not better value, not cheaper, not better. Period.
My indignation would be funny; if it weren’t for actual consumer harm being done to members of our community.

No commissions. Sure. Just a gravy train of over-sized salaries, bonuses and KPI's (AKA commission in drag), and "performance management" AKA: sell or sack.

The most common complaint from bank staff? Pressure TO SELL INSURANCE that they know their customers may not need or want, or that they suspect is inferior to other providers, or worse; the insurance it replaced.

"report, from First Union, says 87 percent of New Zealand bank staff respondents felt pressure to sell financial products to customers who came into the bank. And 50 percent said that the pressure was stronger than a year ago."
source: https://www.newsroom.co.nz/2018/06/25/131055/bank-staff-stressed-by-conflicted-sales-targets

@neelsv you could do worse than to start here:
https://www.stuff.co.nz/business/79938336/life-insurers-exclusions-allow-them-to-avoid-paying-claims

There was this travel claim, fatal car crash - no seat belt. This is the 'unlawful act' thing in action.
http://www.fscl.org.nz/case-studies/claim-declined-failing-wear-seatbelt

Don't forget ANZ's branch sold life insurance quietly boosted their 13 month suicide ex to 36 months.

And remember - this article was just life cover. Russell points out that with Trauma and income the difference is even more stark:

Which bank was the worst in that First Union survey? BNZ. Let's stop in over there first: BNZ want their staff to peddle policies that reserve to right to over-rule your doctor: "An Insured will not be Temporarily Disabled if, in BNZ Life’s reasonable opinion, he or she is engaged or would be able to be engaged, for 20 hours or more per week, in any occupation"
source: https://www.bnz.co.nz/assets/personal-banking/insurance/pdfs/0904-LifeCare-General-Terms-and-conditions.pdf?v=1

I'm spent. Someone else can have a crack at Trauma.
On 24 September 2018 at 9:46 pm gavin austin adviser business compliance said:
Sounds very much like an accidental death policy which excludes alcohol or drug related deaths as they are not deemed to be an accident.
On 24 September 2018 at 10:37 pm RiskAdviser said:
Hi Neelsv, I've done some extensive research on life cover terms and a few were a little amusing, while at the same time they were particularly concerning. The illegal act clause pops up in a number of direct/bank insurance covers.

AA's cover has a clause if exceeding 130km/h and not a fare-paying passenger on a commercial aircraft then there is no coverage. Ironic as this cover is more likely to be insuring a car enthusiast than any other provider.

There are others that are concerning around territorial exclusions, and painful triggering of self-inflicted act exclusion if the policy is lapsed and reinstated, some out to 36 months.

If you search 'death definitions and life insurance' and scroll past the ad's you'll find my 2016 blog on the subject which is briefer than going through every wording.

I haven't seen any significant changes in this space so the article should still be pretty accurate.

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