Age is not just a number when it comes to insurance

Col Fullagar examines what advisers need to know when dealing with clients in different age groups.

Insurers like to claim they are particularly competitive when it comes to selecting ‘target markets’. A recent poll of several insurers led to claims along the lines of: ‘A prime area of strength for us is term insurance where the benefit amount is in excess of $1 million,’ or ‘Our offering for occupations such as farmers is very strong’.

It would not be unusual for advisers to target people for whom they feel the greatest level of empathy, that is, the traditionally popular market of professionals aged 35 to 55.

The reasons for targeting particular groups include factors such as:

• The large number of potential clients, which in turn may be a factor of the gross number or a lack of competitors;
• The level of wealth and disposable income enjoyed by the particular market, which translates into a heightened need and market for risk insurance; and
• Geographic proximity, which might reflect a strong, broad distribution or a concentration in a particular region.

When it comes to clients who appear to satisfy all of the above factors, and some in addition, it would be difficult to find a better qualified group than the over 55s.

The opportunity

The number of Australians in the age group 55 to 75, according to the Australian Bureau of Statistics (ABS), is shown in table 1.

Note that the total number of people in this age group is close to 22 per cent of the population. Also, 35 to 55s are not much larger, making up around 6 million people or close to 28 per cent of the population.

The average net wealth and disposable income of the over 55s is shown in table 2.

We don’t need the ABS to tell us that while people over 55 are more concentrated in some areas, they are well represented in all areas.

There is no better demonstration of the importance and size of this particular market than the constant warnings we are being given about the ageing population and the inability of those coming after them to fund for their needs, which of course leads into the most important of all considerations.

The need

Is there a compelling need and a realisation of that need by members of the over 55s market?

There would be little argument about the need for risk insurance when it comes to ‘working’ Australians over age 55, since their needs fall into the traditional personal and business areas.

But priorities change over time, so the need to protect future income (as distinct from current income) becomes more critical. Future income translates as retirement savings.

If a 35 year old was disabled and unable to work for an extended period of time, this may well have a devastating effect on any retirement savings already made.

However, the good news is this person is likely to have many years left to retirement in which to recover their position.

But someone over 55 who is disabled and unable to work for an extended period does not have this luxury. Thus, the protection of their future lifestyle/retirement savings is of critical importance.

The various superannuation protection options that can be added to income protection insurance policies may well move up the priority list.

Even after retirement, however, some of the traditional risk insurance needs will continue:

• Asset protection – Many retirees will still have a mortgage on their home or they will have borrowings against investment properties;
• Estate protection – Issues such as estate equalisation and the funding of bequests to children and charities may have to be considered;
• Partner protection – Leaving sufficient liquid assets such that someone’s life partner is able to maintain their lifestyle;
• Medical care – The risk of suffering a major medical trauma or a sickness or injury that will severely disable, increases exponentially with age. Without proper funding, expenses associated with medical care and rehabilitation could severely damage a lifetime of asset accumulation or force someone into a less than optimal health care facility; and
• Final expenses – The costs associated with funerals can easily run into tens of thousands of dollars.

Going further, it is not just the over 55s that will have a need for risk insurance protection – it is their children and grandchildren.

If an adviser is doing the right thing by one group this would naturally increase the likelihood of being introduced to others.

It may even be that parents and grandparents could see the funding of insurance premiums for their family as one way of showing their love and support – not to mention reducing the need for family members having to look to parents and grandparents for financial support should sickness or injury impact on their own financial position.

Premium funding by the over 55s would potentially cover all the risk insurance needs but it may be particularly appropriate for grandparents offering protection by way of child trauma insurance.

The risks

Notwithstanding the above needs, it is necessary to sound a special word of caution when dealing with the over 55s.

Product knowledge

The products available and the facilities within those products that satisfy the risk insurance needs of younger clients tend to be more ‘mainstream’. As a result, the adviser’s knowledge of those products is such that misunderstandings about them are less likely to occur.

Impact of error

While advisers will naturally take a considerable amount of care in making a recommendation to younger clients, on average these clients will be better placed to obtain alternative or additional cover so that, if a mistake occurs, it is less likely to be irredeemable.

On the other hand, there is a need for an even greater level of care when dealing with clients over age 55. If an error occurs in the giving of advice to this group, recovery from that error may be impossible for the client and very expensive for the adviser.

Client expectation

The over 55s have been around longer and experienced more and so are likely to have a higher expectation of their adviser both in the areas of the advice itself and also the services that are offered.

This expectation may well extend to quality assistance if a claim is made.

It is not unreasonable that this expectation should exist. After all, the premiums being paid are likely to be considerable.

Underwriting issues

There is a greater chance of issues arising that will be material to underwriters (eg, health problems that will lead to cover being loaded or excluded).

In addition there will be the complexity of assessing factors such as increased levels of assets, liabilities and investment income.

Therefore, if putting insurance in place and particularly if replacing one policy with another, the clients understanding of the duty of disclosure takes on even more critical importance.

On the positive side, over 55s are less likely to be engaging in some of the more hazardous activities enjoyed by their younger contemporaries.

Claims

Risk reflects in premiums and thus, in the same way that premiums for the over 55s increase, so does the chance of making a claim – and with it, the risks associated with an ‘unsuccessful’ claim.

‘Unsuccessful’ doesn’t just imply that the criteria for payment were not met. All parties – the client, the adviser and even the insurer – will have a certain amount of dread that when a claim is made, an unexpected problem will arise.

The problem may be something that could not reasonably have been envisaged even with the wisdom of hindsight and thus it is outside the control of anyone.

On the other hand it may be that either a genuine mistake has occurred or the client’s circumstances have altered resulting in the adviser recommendation being seen as less than optimal:

• An income protection insurance policy on an indemnity basis when agreed value would have been more appropriate;
• A total and permanent disability (TPD) policy replaced several years before included an exclusion to cover that did not exist in the previous cover; or
• A stand-alone trauma insurance policy that the client thought contained death cover.

‘Unsuccessful’ for an over 55 may mean that the claims process was not in line with their reasonable expectation (eg, a multi-million dollar death claim being unexpectedly and sometimes unnecessarily delayed while claims requirements were obtained).

A recent example was the delaying of a terminal illness claim for many weeks while a ‘mandatory’ but unjustified Health Insurance Commission report was obtained. Eventually the insurer waived the requirement in order to enable claim payment to occur prior to the client dying.

At the time of claim, the correcting of errors is difficult at best and sometimes impossible.

Policy expiry

Policies can end for various reasons, such as premiums not being paid. However, they also end when the policy expires – either as a result of the client reaching the policy expiry date, or the client taking some other action such as permanently stopping work.

As clients draw closer to the policy expiry date, there is a growing importance for the precise date of expiry to be known and communicated.

An income protection policy or a business expenses policy may have been promoted by the insurer, understood by the adviser and presented to the client as being renewable to age 65.

However, if the policy expiry date is the policy anniversary prior to age 65, this may be anything up to 12 months earlier (eg, if the policy anniversary was the 1st January and the client’s 65th birthday was the previous 31 December).

If clients are looking to work to age 65 and they need their insurances to continue working with them, the clients are unlikely to be impressed if the cover ends earlier than they want it to.

With retirement ages being extended, it may be necessary for the adviser to plan client needs several years in advance.

For example, income protection insurance policies with benefit periods to age are available, but there will be age limits as to when an application for them can be made. Waiting until the client’s existing policy is about to expire before replacing it may be too late.

Claim payments

The vast majority of income protection insurance policies in place have a benefit period ‘to age 65’ and it is not unreasonable that they would be promoted in this way.

Unfortunately, when a claim is being paid under a policy with a benefit period ‘to age 65’ this does not necessarily mean benefit payments will continue to age 65. There is usually a policy provision that states claims payments cease when the policy expires which, as indicated, may be one day after the client turns age 64.

With the larger average benefit amount that will exist for the over 55s, the ‘loss’ to the client could be considerable and not just financial (eg, the early cessation of a business expenses claim could endanger the financial viability of the client’s business).

If the duration of claim payments is not in line with the client’s expectation and need, disputes may ensue.

Loss of policy facilities

Not only does the policy itself have an expiry date, but various facilities within it have their own expiry date that may be related to the client’s age or actions the client may take.

Examples might include:

• Guaranteed insurability options ending at age 55;
• Automatic indexation increases ending at age 65; or
• A lump sum insurance waiver of premium ceasing at age 70.

Some policies provide for the level of cover to reduce after a certain age, for example, TPD reducing to a pre-set amount after age 65.

Alternatively, some policies provide for the insured benefit amount under TPD to reduce by 20 per cent each year from age 60 through to age 65. If the client is not aware of this or if there are any avoidable delays in claim assessment this could lead to the client receiving a nasty and unexpected surprise when their claim proceeds are paid.

In addition to the insured benefit amount potentially reducing at or from a pre-set age, it is common for the nature of the cover to also alter. For example, TPD cover may change from an occupation assessment basis to a basis revolving around the inability to perform a number of the activities of daily living.

An adverse client experience caused by the unexpected activation of a policy facility can lead to disputes in much the same way as an unexpected policy expiry.

Changes in premium type

While some advisers might set up a client’s long-term insurances on a level premium basis, the more astute adviser will appreciate that level premium policies generally revert to stepped premium at certain pre-determined ages (eg, age 65 or 70).

When this occurs, a level premium set up at age 35 for $1,000 a year may well jump to $20,000 a year when it alters to stepped.

A call from the adviser to the client the month prior to this occurring is unlikely to impress. It may be that a strategy several years before the automatic conversion will need to be developed and implemented.

This strategy may include identifying ways to set up funding vehicles, streamlining cover or, if necessary, reducing the level of cover.

Litigation

While there is a heightened need for care by the adviser when dealing with over 55s, the good news is that if the adviser has been successful on the investment side of the clients financial planning, at least the client will be able to afford the best legal representation available should something go wrong with the risk insurance advice.

The adviser may have worked with a client over many years and developed a sound friendship as a result.

Unfortunately, it is likely that this friendship will be set aside either deliberately, because of the client’s anger over what has occurred or as a matter of necessity, since this is the only way for the client to access compensation from the adviser’s professional indemnity insurance.

The facilities

Having sounded the appropriate words of opportunity and warning, what are some of the risk insurance products and facilities available to and impacting the over 55s?

A request sent to twelve insurance companies recently for details of their ‘offering for older folks’ generated nine responses.

The products and facilities offered included maximum application ages for insurances as high as:

• Term – age 75;
• TPD and trauma insurance – age 68 but on a restricted activities of daily living (ADL) basis;
• Income protection and business expenses insurance – age 60. For income protection insurance, after age 65, the benefit period will reduce to one or two years. Maximum levels of cover also revert to around $20,000 a month; and
• Specialised income protection – age 69. These typically would have a two-year benefit period, total disability only, maximum benefit amount of $6,000 a month.

The products and facilities offered included maximum expiry ages for insurances as high as:

• Term – age 100;
• TPD and trauma insurance – age 70 then converts to ADL;
• Income protection insurance – age 70;
• Business expenses insurance – age 65; and
• Specialised income protection – age 75.

As mentioned above, ‘age’ should be read as ‘policy anniversary prior to age’ in some cases.

The future

With the ageing population and the extension of the retirement age, it is inevitable that more clients will need risk insurance protection for longer periods – and it is inevitable that more advisers will start to work and specialise in the over 55 market.

While there are some products available to satisfy the risk insurance needs of this group, the range is somewhat pitiful when compared to what is available to the more popular traditional markets.

Dare it be suggested that this lack of insurance options may be contributing to an underinsurance problem for the over 55s?

Possibly in the future more insurers will see merit in moving some of their product development focus from the continual tweaking of mainstream products and instead make available a greater range of quality products for the over 55s – after all, the executives running the insurance companies aren’t getting any younger.

Col Fullagar is national manager, risk advice, at RI Advice.