Mind the insurance gap

The importance of maintaining insurance premiums cannot be underestimated as you never know when the unexpected will occur, writes Tim Browne.

When we speak of tragedy in the insurance industry, there is a common understanding that we are referring to the cases of death, trauma, and disability that we encounter on a regular basis.

The tragedy of such claims is thankfully tempered by the many individuals who receive quality advice and are financially protected through these difficult times – and we can certainly be proud of this adviser, insurer and client relationship.

To me however, the real unspoken tragedy is the scenario where an individual has no cover in place or has allowed their cover to lapse.

A good example is a situation where an adviser arranged a life policy for a young truck driver and his wife – they wanted to protect the modest mortgage on their new house. The policy was active for two years before the monthly premiums stopped.

Two months later, as the policyholder was tipping the tray on his truck, it struck power lines – he died instantly. The wife asked her adviser how she could make a claim but unfortunately the policy was deemed to have lapsed and the claim was denied. What makes this story even more devastating is that a cheque for the missing premium was found in the cabin of the truck and the wife was five months pregnant.

Cash flow issues may well have been at play in this example, and are clearly one of the key reasons why individuals allow their life insurance policies to lapse. Increased living expenses are also certainly not helping.

As shown in the latest Australian Bureau of Statistics (ABS) Household Expenditure Survey, released in early September, Australians have increased their spending on household goods and services by 38 per cent over the last six years.

The ABS also found that the greatest increases in average weekly spending were housing costs, which can be put down to increases in mortgage interest payments and rent payments (up $80), and miscellaneous goods and services (up nearly $40). 

Unforseen expenses often come at the most inopportune time and can leave clients short of funds, particularly when a number of large, unexpected bills fall due together.

Out-of-the-ordinary expenses, such as braces for the kids, a full car service or a medical emergency, can tip the budget into the red, leaving clients struggling to pay their bills and looking for expenses to cut. Then their life insurance premium notice arrives. What do they do?

The adviser role is critical in helping clients to avoid a lapse. If affordability is the reason for a policy lapse, your client may wish to decrease the sum insured, put the cover in superannuation, increase the waiting period, decrease the benefit period, or combine covers, such as term, trauma and total and permanent disablement. Some cover is better than none at all.

Your client management system will also be king, with diary reminders for policy renewal dates. For clients who wish to cancel their policy, you might refer to the original Statement of Advice and remind the client why they set the cover up initially.

Remind them what would happen to their family if something were to happen. You can also explain that they can reduce the cover in the future, once their debts reduce or their children are older. 

It's important to explain the possible consequences to clients should they lapse. The biggest concern is that if your client stops paying premiums and lets the policy lapse, they lose valuable protection, possibly leaving their family at financial risk.

Life insurance, for example, is often the linchpin that holds your client’s estate together. If they die prematurely, their death benefit proceeds are often required to settle final expenses, pay off debts and, at the very minimum, give surviving family members room to adjust.

If your client’s policy lapses and they seek cover at a later date, another concern is that they will likely need to pay more for the same level of coverage and forgo policy benefits. This situation occurs because age is a key factor in deciding premiums, so the older the client at the time of issue, the higher the rate will be. Also, under existing cover, changes in your client’s health do not affect their premium.

However, if they are reapplying for cover their current health situation will be the basis for the premium, and may result in cover being denied altogether.

I recently heard a great story from one adviser dealing with a young, single mother client. The client had existing life and funeral cover but was finding it difficult to afford the fortnightly payments and was considering cancelling the policy.

The adviser generated comparison premiums and was able to offer more comprehensive cover, including trauma insurance, at a reduced cost, allowing the client to maintain her cover.

As in the above scenario, advisers continue to demonstrate their value by selecting the right amount of insurance for their clients, getting that insurance in place and managing the claims process. With increasingly uncertain economic times meaning questioning of every dollar spent, a key role for advisers will be reinforcing the value of insurance and striving to keep those policies in force. 

Tim Browne is the general manager of retail advice at CommInsure.