Keeping a handle on risk premiums

Would it be sacrilege to suggest that the most important skill set for the risk insurance adviser is not collecting data for a risk analysis, nor calculating the correct type and level of cover, and in fact it is not identifying the most appropriate policies to put in place. The most important skill set is price control.

The cost of the risk insurance recommended by an adviser is a matter of material importance to the client. Somewhere between ‘find me the cheapest cover available’ and ‘I want the most appropriate irrespective of cost’ lies pretty well every client.

At the time of delivering the initial advice, clients are accepting of the total premium. If this was not the case, the insurance would not be put into place. However, every review after that potentially becomes a challenge.

Clients will generally accept small or steady premium increases, but nasty surprises are unacceptable.

The ability of the risk insurance adviser to use the various product tools available in order to keep the premium both reasonable and predictable is not only the most important skill set, it is also the most underrated.

There are many premium tools available and this article will look at some of them.

Stepped v level premium

The first tool is the best known and sometimes considered the only one.

Table 1 shows the cost of a $1 million term combined with $10,000 a month income protection.

Over a 30-year period, the cost of a stepped premium goes up tenfold while the cost of a level premium stays the same. Note: present day values are being ignored.

The challenge for the adviser is that the cost of a level premium may initially be too expensive, but inevitably the stepped premium will become too expensive.

One way around this is to remember the fundamentals of stepped and level premiums — a stepped premium is great in the short-term and a level premium is equally as great if the policy is maintained in the long-term.

Therefore, if one type of insurance was needed in the long term and the other for a shorter term, there is nothing to stop a recommendation of term insurance, for example, on a level premium and income protection on a stepped premium.

This results in a premium saving of between 12 per cent and 50 per cent at various stages throughout the policy life cycle.

Going further, the adviser may identify that not all of the term insurance is needed in the long term, therefore, part may be taken on a stepped premium and part on a level premium, once again leading to greater premium savings.

The key is to adapt the premium type to the insurance need — stepped for short-term needs, level for long-term needs.

Split benefits

Another way to control premiums is to split benefits.

(i) TPD — own v any occupation

Rather than have the full benefit amount as one or the other, if the premium becomes too expensive, there may be circumstances where a split between the two could constitute appropriate advice (eg, if the client has been in one occupation for a number of years such that the difference in real terms between ‘own’ and ‘any’ is minimal).

This can lead to a saving of up to 10 per cent.

(ii) TPD — lump sum v revenue

A premium savings may be appropriately recommended by replacing some lump sum total and permanent disablement (TPD) with revenue TPD.

(iii) Income protection — agreed value v indemnity

The extra cost of an agreed value policy (around 12 per cent) may be better utilised in other areas if, for example, a client moves from a self-employed to an employed situation or their income becomes less volatile and looks like remaining that way for the foreseeable future.

(iv) Income protection — waiting and benefit periods

Also, rather than simply having $10,000 a month on a 30-day waiting period with benefits to age 65, it may be more appropriate as liquid assets or sick leave increases to retain $5,000 on a 30-day waiting period to age 65 and to complement it with $5,000 on a 90 day waiting period to age 65, or later, even reduce it to a two or five-year benefit period.

Table 2 shows the relative cost of two and five-year benefit periods and a benefit period to age 65.

Savings of up to 30 per cent!

Option sacrifice

The relevance and cost of any optional benefits should be considered at review time — and nothing is sacred.

The increasing claim benefit option is generally considered a compulsory inclusion within an income protection insurance policy, however, in a low inflation environment, as the client approaches age 65, the need for claims indexation may decrease.

For a 50 year old, the cost of claims indexation can vary from around 5 per cent on a five year benefit period, up to 15 per cent on a benefit period to age 65.

Ancillary benefit sacrifice

As clients mature, their circumstances change.

It may be that many of the ancillary benefits within their income protection insurance policy are becoming less relevant as liquid assets have increased, children have left home, and so on.

Therefore, it may be appropriate to convert their comprehensive income protection insurance policy into a more focused one.

Table 3 shows the premium difference between CommInsure’s comprehensive offering, Income Care Plus, and its Income Care.

Premium freeze

Finally, there is the facility to freeze premiums, however, again, it may be possible to freeze the premium for some rather than all of the cover under a policy, and certainly for one policy but not necessarily for another.

Summary

There may be a temptation to look at some of the policy changes mentioned above and feel these should never be recommended.

However, there are two strong counter arguments to this:

— if the client is finding the premium restrictive, the alternative to policy changes may be cancelling the insurance altogether, which is unlikely to be a good alternative; and

— the suggestions above may well be 100 per cent appropriate for the client’s changing circumstances.

In line with the above, I stand by my initial statement: the most important skill set for the risk insurance adviser is price control, the ability to use the various product tools available in order to keep the total risk insurance premium both reasonable and predictable.

For the record, by utilising only some of the mentioned price control tools, instead of the premium increasing tenfold between age 30 and 60, it may only double — an enormous saving for the client.

An adviser who is able to clearly demonstrate an ability to alter the policy variables such that the cover is moulded around a client’s evolving needs will be an adviser who is highly unlikely to ever see clients go elsewhere.

A win for all parties. Who said risk insurance wasn’t sexy.

Col Fullagar is the national manager of risk insurance at RetireInvest.