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What do you cut when something has to give?

What’s the right process for cutting cover when the client’s budget is tight?

Monday, May 23rd 2016, 11:45AM 2 Comments

by Russell Hutchinson

Perhaps the starting point is the so-called ‘ideal’ package of cover and the client has revealed a substantially smaller budget. Maybe a client has had a bad year and now needs to reduce their insurance package. Or finally a 14% annual increase rate in rate-for-age premiums has caught up with a client now in their early fifties and after swallowing it for 15 years they are finally calling to tell you to cut it down.

You have tried to conserve it entirely as is, but pretty soon you may just be glad the client trusts you enough to have the conversation and not quietly cancel the direct debit and take out a little cover somewhere else instead.

Clearly, having an organised view of priorities is a great place to start. I have seen advisers almost come to blows over whether medical insurance was more important than income protection – so I certainly will not dictate to you what the answer is, but you must develop a strategy so you can give coherent advice and rationale for the approach you take. One example I have seen works like this.

First they check the client’s financial situation – if there is cash at hand or access to reasonable credit headroom then push out all the excess levels and wait periods. Lots of clients can save a lot by going from a nil excess to $1000 and going from four weeks wait to 13 weeks.

If that avenue is closed or already exhausted then the attention is turned to the benefit period for income protection. Sharing with the client the news that most claims do not last longer than two years a suggestion is made to reduce the benefit period. After that the sum insured is cut back from 75% of income down to 60%.

Medical insurance can be pruned but this adviser always tries to have the client retain specialists and tests cover where that is possible given product structure.

Cover levels for life, trauma, and TPD are reviewed last. Trauma is always the focus because of the expense, but after seeing so many claims we both agree that even a small level of trauma should be kept - $25,000 can make a world of difference. Keep an eye on whether you can get back the cover you cut without medical evidence through special events increase options. Finally disposing of entire covers is contemplated.

All the way through it is important to share your rationale with the client and data to back it up – the likelihood of claim and to consider the financial impact of claim. There is difficulty in balancing the desire to keep the customer involved with the reality that they probably do not much like this conversation either. Remember to consider their ability to understand what you are talking about and their preference – they do get the last say.

Russell Hutchinson

Tags: Insurance Advisers Life insurance Russell Hutchinson

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Comments from our readers

On 26 May 2016 at 3:08 pm Dr Know said:
Well written Russell and a sound approach. It's never a good scenario when the strict brief from the client is to reduce premiums. Manipulation of variables such as excesses and wait periods (to name only two) are often under utilised. Anecdotally, the amount of "ditching" of Income Protection, TPD and even Health Insurance because trauma insurance is perceived as some sort of panacea has concerned me for some time.
On 26 May 2016 at 4:35 pm AFA Muggins said:
Great article Russell,

Coincidentally, I just had such a discussion with a client today prior to seeing your article. It gives another perspective to helping the client deal with their increasing costs.
Thank you.

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