Putting the case for income protection

The concluding part of Jon-Paul Hale's IP series; reducing cover levels will increase pressure on the already strained public health system.

Tuesday, February 25th 2020, 6:00AM

A final point on the subject on income protection sustainability is the comments about over insurance; sure there is some level of this that happens as agreed value claims can artificially hold up claim levels long term when the underlying income has reduced. As too when on claim, there are increased costs that are not accounted for by policies.

These costs are expected to be absorbed by the policyholder out of their claim payment. Can be somewhat difficult when they chose to be underinsured more than usual too.

One bit that has not been mentioned and is potentially the most significant, income protection is there to support the family’s lifestyle in adversity. It is not there to slowly grind the policyholder and their family into the ground.

Many claims have a degenerative nature to them, where an initial claim gets people on their feet, but they now have a compromised ability to earn. This then rolls into the next claim, rinse and repeat.

The harsh reality is in these degenerative claim situations, anything other than agreed value products will progressively deliver lesser benefits.

And it is this compounding nature that results in the undermining of someone’s capital and asset position. Where instead of heading into retirement with a comfortable level of support, they are broke and destitute.

This is also without KiwiSaver, as it has been used to survive hardship and they now face life renting and trying to live off the pension that is far below the value it would have been if they had not been impacted by disability.

These are the reasons people have income protection. Stuff happens, they are not traumas or permanent disabilities, but they have a similar impact to a trauma condition.

So before we take the short-sighted view of the profitability of insurers and kill a valuable and much-needed product, let's look first at the system. This is where the engaged discussion of the insurers and the Financial Services Council with government is needed.

There needs to be more efficiency of our health system, fewer managers justifying jobs and more people on the ground being paid for the valuable work they do.

No, this isn’t about pay rises for doctors; they are well paid, I see that in the payslips I underwrite for doctors. Yes, many would like more, that's the human condition.

Talking to one specialist late last year, they work out of three different clinical spaces plus their public hospital service. Why? Because they can’t get access to a consistent space in one location for what they do. There isn’t enough clinical space for the people we have.

On top of that, we need more hospitals, more nurses, more clinical specialists. And our present ageing hospital infrastructure needs a massive update too.

Paying the ones we have more isn’t going to increase throughput, though nurses need to be recognised for their efforts and paid accordingly too.

The key, more facilities and experienced bodies are required in healthcare to deliver to the needs of New Zealanders across the spectrum.

This is where shopping for specialists overseas is needed. We already have some of the best specialists in the world here; many are immigrants. We are benefiting from this, but we need more.

We have an excellent private health system because the public one is failing people. Reduced insurance coverage is just going to make the public system worse.

This is the conversation that the FSC and insurers need to have with the Government. Our dealer groups and industry bodies too, though they have less direct product manufacturing influence.

Circling back to the other point I raised above, the understanding of the insurance industry from the outside is a bit like the original Die Hard movie. Yes, it is a Christmas movie.

The outside looking in has a view that does not have the perspective from the inside. This results in a bunch of assumptions that are entirely off base and miss aspects you wouldn’t consider elsewhere.

Every product in the world, except life insurance, works on a positive basis; it solves a specific problem that is present now. Insurance is about solving a problem that may develop in the future.

For mortgages, its money to buy the dream home today, for the credit card, with the bill about to arrive, it's about buying Christmas presents. Investments and KiwiSaver are the accumulation and management of money for later, but it’s still there and tangible right now. Even house insurance is about enabling the purchase of the home, as the bank won’t hand over the money without it.

Life insurance stands alone as a product that is a double negative, that you pay for now, in the hope you don’t need it later.

And when something does go wrong, there’s never enough; there is always the coulda, woulda, shoulda hindsight view.

Add to that deep emotions, especially if you have someone that has died suddenly, not arranged their affairs well, and under-insured themselves.

The survivors in a family are not going to blame the deceased at that point, it’s too raw, and they can’t get any help in that direction.

So the insurer, and maybe the adviser, are the ones that face that barrage of negative emotion about the position they have been left in. They may have to sell the house; there may not be the college funds they planned. This is where the bulk of claim complaints happen, even with claims that have paid.

All because the deceased policyholder decided that they would only take enough cover that $20-$30 per week buys, rather than insure their real needs.

So before we start driving the propaganda wagon about unsustainable products, let's get the real picture out on the table and talk about what can be done.

Because the last thing we want is the removal of good, usable products from the market or the isolation of these products for new business, as that will drive the exodus by policyholders and financial pressures for the insurers in ways we don’t want either.

Tags: Income Protection insurance Jon-Paul Hale Opinion

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