Life insurance: Self-fulfilled versus advised

Customers take out insurance through a multitude of channels, including directly and via financial advisers. And with a major underinsurance issue in Australia and a huge knowledge gap as to how much and what type of insurance to take out, financial advice has a critical role to play, as Tim Browne explains.

There are two major distribution channels for life insurance: self-fulfilled (no advice) and advised. Self-fulfilment may be via the individual’s super fund, either by accepting the default cover available or applying for tailored amounts.

Life insurance can also be purchased as part of a bundled policy with a loan, providing protection for repayment of the loan in the event of sickness, injury or death.

Finally, there is a direct method, where an individual purchases insurance directly from the insurer via Internet, mail or telephone, choosing their own cover with payment by direct debit or credit card.

In the above cases the most significant problem facing a customer is how much is enough? If a customer is unaware of how much life insurance is sufficient for their individual situation, there is a risk that they may not purchase enough cover and therefore be left underinsured.

The issue of underinsurance is of particular importance with ‘living insurances’ like total and permanent disability (TPD) and trauma, where a claim can have a broad range of severity.

It is only through expert analysis and assessment of a client’s situation by specialist risk advisers that clients purchase appropriate levels of life insurance for their individual needs.

Advisers also have a role in educating and explaining the need for protection, answering any questions an individual may have, which in turn, helps to alleviate underinsurance.

This sentiment has been further demonstrated by research from KPMG and the Financial Services Council.

Looking at average sums insured for all types of policy across different channels, the study found that customers taking out insurance through an adviser had the highest average sum insured, and therefore likely claim, with the lowest sums insured for customers taking out insurance direct.

This epitomises the value of advice.

For death policies, for example, the average sum insured for an advised customer was $308,212 compared with just $99,954 for direct (including mail, Internet and telemarketing).

It is also interesting to note that advised clients have a consistently higher sum insured than non-advised clients for death and trauma. For trauma policies, the average sum insured for an advised customer was $182,387, compared to $67,015 for direct.

The same story can be told for TPD policies, with an average sum insured of $271,546 for an advised customer, and less than half for direct at $105,513.

The provision of life insurance advice can be very labour intensive. With holistic advice, where the adviser considers the client’s entire financial situation, a full SOA (Statement of Advice) will be prepared. In most cases, the preparation of this document can take up to eight hours.

Then consider the process of dealing with doctors and underwriters prior to the client obtaining a full advice product. It is during this important in depth needs analysis that an adviser determines the true level of insurance required for their individual client.

Advisers play a vital role in bridging the underinsurance gap by improving client understanding of the role of personal insurance, educating clients on the gap in default insurance provided through superannuation and communicating the likely impact of a traumatic event on a client’s financial position.

Tim Browne is general manager of retail advice at CommInsure.