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A controversy or lost opportunity when we talk about sum insured

Wednesday, October 28th 2020, 10:27AM

by Russell Hutchinson

How we talk about sum insured may be underselling insurance – and it is surprisingly controversial. One training manager I know thinks Fidelity Life’s trauma multi oversells itself by stating a sum insured which is the maximum possible payable for five trauma claims. They

think that could only be paid in rare circumstances so Fidelity Life should talk about a figure which is more likely. Although I am not sure about that, after all, if you consider that the typical policy life is slightly less than a decade the typical claim for the majority of policy

holders will be nothing. After all, insurance is about catastrophes and pooled risk: there must be more lucky non-claimants to pay for the unlucky claimants. But the idea ain’t all bad – more on that later.

In fact, the industry probably understates sums insured far more than it overstates them. Sure, with life insured the situation is simple. With living benefits, however, it is anything but simple.

AIA does a remarkably effective job of understating the cover offered by their accidental injury benefit. The ‘sticker’ sum insured is the minimum amount that would be paid. Most claims would pay a multiple of this amount. I suspect this is partly because it is often marketed

to a segment who are looking at a weekly, fortnightly, or monthly income figure, and partly convenience for the mechanics of the product. The outcome is a massive understatement of the financial risk transfer, the direct opposite of the example above. It may mean that

people see the cover as expensive.

The most extreme example is income protection, where understating cover is the rule, and a strange one it is too. Most companies describe the sum insured as either an annual or a monthly cover amount. A thirty-five-year-old with a sum insured of $8,000 per month has a

benefit of $96,000 per year, but if they are buying to-age 65 cover the benefit could be over $2.8million. Research tells us that New Zealanders think of insurance cover as expensive – yet income protection looks like a lot better value when you talk about the maximum

possible sum insured. A few insurers show this in quote projections, but it remains in the background and the focus is on price and the “monthly benefit”.

Financial advisers reading this have an opportunity to correct this mistake when writing marketing material and statements of advice. Taking a slightly different approach, rather than talking about either the maximum or minimum sum insured. Talking about the likely sum

payable over working life might be a reasonable middle path for presentations. Here are some examples for your reference:


Male age 35 non-smoker



Income protection

Stated sum insured

$   500,000

$   500,000

$        8,000

Maximum sum insured

$   500,000

$   500,000

$  2,880,000

Likelihood of claim by age 65




Sum insured multiplied by likelihood of claim

$     45,000

$     87,580

$     279,936

The likelihood of claim event was calculated by Peter Davies, of Davies Financial and Actuarial using his NZ Experience table to the end of December 2017.

Tags: Opinion Russell Hutchinson

« Which advisers will win the future?Why life expectancy has improved – and how much further we can go? »

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