by Russell Hutchinson
The old complaint that if you insure your home loan payment, then the party you have protected is the bank, not really you or your family, has some validity to it. That’s because the goal should be: “if I can’t work, we get to keep our home”, not the implicit “the payment on the home loan is made.”
Using a goal to describe what we want to happen – rather than complicated maths – helps to connect with clients. We still need the maths, but clients want you to do that for them. The idea runs something like this:
If you can’t work – what do you want to happen? Pause. Nervous shuffling. Eventually we agree that we would like some income to be paid. We know ACC won’t cover everything, so we look at income protection. We discover that the limit is roughly 75% (with variations, I know). We can add some trauma, we can add some TPD (sometimes it is built in, we can top it up) we want some life cover. The amounts are a question. How much depends on the goal.
A goal based approach to the amounts can be described like this:
Even if I can’t work / a terrible disease happens / or I die… “all my goals for my family can be achieved” – the kids get to go to uni, the super is completed, and so on. That’s expensive – sometimes very expensive depending on underwriting and the amounts involved. But you work out the numbers and show it. But a fall-back goal can be identified:
Even if I can’t work / a terrible disease happens / or I die… “we can at least keep our home”. In this case, we know we may struggle a bit. One will have to work. We hope that the disability isn’t permanent and I can return to work. Things may be tight, but at least we get to keep our home if we want to. But even this appears to be beyond a substantial majority of the buying public, given the very low rates of income protection purchase.
Even if I can’t work / a terrible disease happens / or I die… “we can survive a while and work things out” This is not so good. But what if the client cannot even afford the insurance required to keep the home. It does happen. Then we can aim for covering a period. Some time, in which I could recover, and get back on my feet. At the end of it, I might have to sell up, but at least it would be managed. The family would have a chance.
After the goal is set, a capital needs analysis is required. But the client just want to know that you used the right data and you are competent to work it out. They are employing an adviser after all.
On the other hand, you can come up with a number out of thin air and kinda suggest that it will meet one of these goals. But that’s risky.
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