Risk insurance comes to the party
Col Fullagar lists six conversation topics about risk insurance which could no doubt create passionate discussion.
It is the great social dread, being at a party or social function and suddenly realising you have nothing of value or interest to add to the conversation.
Life flashes before you as you desperately try to think of something to say.
For those in the ‘at risk’ group, this article may provide some hope, as the use of one or two of the questions posed in a conversation lull will no doubt create an impression.
The impact will be striking and immediate, and there is the added advantage that the subsequent discussion may prove of value – not only in a social sense, but a business one as well.
Question 1
If a client had an income protection insurance policy with a benefit period to age 65 and the client became permanently disabled, for how long would benefits be paid?
Those responding with the obvious answer of “to age 65” could be smiled at knowingly and advised “maybe, but not necessarily”.
This no doubt would generate deeper thought from others who might venture “to the earlier of age 65 and the death of the life insured”.
Again – a charitable smile and the same “maybe, but not necessarily.”
Having now captured everyone’s attention, an explanation can proceed.
Notwithstanding the popular vernacular might be “benefit period to age 65”, benefit payments will only continue up to the policy expiry date, which may be age 65 or it may be the policy anniversary prior to or after age 65.
Case study
Jim was born on 1 January 1950 and will turn 65 on 1 January 2015.
His financial adviser recommends he takes out income protection insurance, pointing out that if he is disabled, benefits will be payable “to age 65”.
Jim accepts the recommendation and the policy starts on 1 February 2010.
A year later, Jim is permanently totally disabled. His claim is accepted and benefit payments start.
Jim rearranges his financial affairs on the basis that benefit payments will continue through to 1 January 2015.
Unfortunately, Jim’s policy actually expires on the policy anniversary prior to age 65 – ie, on 1 February 2014 – a full 11 months before his 65th birthday (the maximum difference between a birthday and a policy anniversary can be up to 1 day short of a year).
As a result, Jim receives $110,000 less in claim payments than he was expecting – ie, 11 x $10,000.
Jim’s financial security is thrown into turmoil – as is Jim’s adviser’s financial security – as Jim commences proceedings against him on the basis of misleading advice.
Precision in financial advice is important if unpleasant surprises are to be avoided at the time of claim.
Question 2
Is it true that with an indemnity income protection insurance policy, the payment of one claim may render subsequent claims effectively null and void?
The short answer is ‘yes’, and again, the issue is best illustrated with a case study.
Betty is earning $80,000 and insures 75 per cent of this ($5,000 a month) under an indemnity income protection insurance policy.
The definition of pre-disability earnings (PDE) is similar to most in the market – ie, the average earnings over the 12 months prior to disability. ‘Earnings’ are defined as those received due to the ‘personal exertion of the life insured’.
Several years after taking out the insurance, Betty suffers a sickness which renders her totally disabled.
Betty’s claim is admitted, and she receives the lesser of the insured benefit amount ($5,000) and 75 per cent of PDE ($80,000 x 0.75/12) – ie, $5,000.
A year later, Betty recovers and returns to work, but tragically, the next day she is involved in a serious motor vehicle accident and is permanently totally disabled.
Betty submits a fresh claim fully expecting that benefit payments will recommence.
The insurer, however, informs Betty that as this is a new claim the amount payable has to be recalculated – ie, the lesser of the insured benefit amount ($5,000) and 75 per cent of PDE.
However, because Betty was on claim for 12 months prior to the motor vehicle accident, her “personal exertion earnings in the 12 months prior to the (new) claim” are nil.
Thus, Betty is entitled to a benefit amount of nil.
Betty is less than impressed, and like Jim, decides to issue proceedings against her financial adviser.
In brief, the issue is that under an indemnity income protection insurance policy, if the insured suffers a new disability within 12 months of returning to work from a previous disability, their benefit entitlement may be adversely affected.
To overcome this situation the insurers would need to make an appropriate amendment to the definition of PDE.
Question 3
A client has income protection insurance with a benefit period of lifetime accident and to age 65 sickness. Is it better to retain this or replace it with accident and sickness to age 65 or 70?
Without client specifics, this question can only be discussed on the basis of theory, and thus, the usual disclaimer regarding general advice must apply.
Income protection insurance should protect the lifestyle of the insured and their family to the extent that this lifestyle is reliant on the earned income of the insured.
Generally, protection would be to the planned retirement age of the insured because after retiring, lifestyle protection falls to superannuation savings that have accumulated over the insured’s working years.
In line with the above theory, a recommended benefit period to age 65 or 70 for both accident and sickness would appear more appropriate, bearing in mind that “over insurance” by way of “lifetime” benefits can be just as inappropriate as “under insurance”.
An exception to the above logic is if, at the time of the financial advice, the insured’s superannuation savings were clearly deficient and would remain so, an argument could be made for lifetime benefits being an appropriate supplement to what savings did exist.
If this recommendation was to be made, it would be important to provide precise details of the lifetime cover – for example, is it only providing total disability cover after age 65?
Does the benefit amount scale down after age 60? If the insured is not disabled at age 65, does the policy expire anyway?
The financial adviser might also point out that different benefit periods for accident and sickness can give rise to disagreements about the cause of the disability – ie, the insurer has a vested interest in the cause being sickness, whilst the insured would prefer the cause to be deemed an accident.
Disputes rarely reflect in a positive way on the insurer, the financial adviser or the industry.
The correct answer is, of course, not that one option is better than another, but that one is more appropriate than another; and therein lies the skill set of financial adviser analysis.
Once the analysis is completed the theory is an important part of providing the client with a basis for the recommendation.
Question 4
Do insurers have the right to promote their products direct to an financil adviser’s clients?
This question was posed to a number of insurers who virtually all responded in line with the following:
“Within our distribution agreement we state that we will not market to an adviser’s clients outside the policy contractual terms – ie, sending account and premium overdue notices, etc.”
Whilst the response might be in part correct – in that it reflects current practice – it does not necessarily reflect what “rights” the insurer possesses.
It is common for wording along the lines of the following to be included in the insurer’s Policy Disclosure Statement, usually, and somewhat ironically, in the section headed “Privacy Statement”:
“Before providing us with personal information, you should know that … we may use personal information collected about you to notify you of other products and services we offer. If you do not want personal information to be used in this way, please contact us.”
or
“Group organisations will collect personal information for the purposes of letting you know about products or services from across the Group that might better serve your financial or lifestyle needs.”
It may be the case that if an financial adviser does not want clients contacted direct by the insurer about alternative products and services, it will be necessary for the adviser to specifically instruct the insurer to this effect.
Question 5
A financial adviser has reasonable grounds to suspect that a client is committing a fraudulent act against an insurer. The adviser should:
- Immediately advise the licensee;
- Speak to the client and ascertain if in fact a fraud is being committed;
- Say and do nothing because the adviser has a fiduciary duty to the client;
- Say and do nothing because the adviser does not want to get involved; or
- Immediately terminate the relationship with the client and make an appropriate file note.
The following comments which respond to the above scenario simply comprise one view and should not be taken as formal legal advice.
Licensees should investigate and develop their own policy for this and similar situations, and these should be made available to the financial adviser so there is no uncertainty as to what action should be taken.
Having said that …
Under the financial adviser’s fiduciary duty to their client, the adviser is required to maintain confidentiality in regards to information obtained about their clients.
This duty of confidence is, however, subject to a defence of disclosure for just cause or excuse, the clearest example of which is disclosure of a crime or a civil wrong. Disclosure in this situation is subject to the test of whether it is in the public interest to disclose.
It would be difficult to imagine a situation of fraud or attempted fraud when disclosure would not be in the public interest.
If the financial adviser knows or has reasonable grounds to suspect that a fraudulent act has occurred or is being considered, the adviser should immediately speak to the licensee.
The licensee may direct the financial adviser to return to the client and recommend that the insurer should be advised of the correct position.
If the client fails to do this, the adviser might subsequently notify the client of the possible consequences of their actions in regards to their contract of insurance and refuse to act further for the client.
In more serious situations, the licensee may direct the adviser to have no further contact with the client.
Depending on the circumstances, the licensee may in turn contact the professional indemnity insurer, the licensee’s legal representative and the insurer of the client’s policy. It may even be that the police are advised in an extreme situation.
Failure to take appropriate action such as that above could result in the financial adviser and licensee being implicated in any fraudulent actions of the client.
The correct answer is (a).
Question 6
In simple terms, why would a client consider both trauma and TPD insurance?
Despite the perception held by some that trauma insurance renders TPD redundant, there is generally a need to consider both.
True, there is a significant overlap of cover between the two products; however, there is also a material gap in cover if TPD is excluded in preference to trauma insurance.
Simply put, the gap appears in two areas:
- There will be sicknesses and injuries that may render a client TPD that are not necessarily covered under trauma insurance; some musculoskeletal injuries, and mental and nervous disorders being two examples; and
- There are some trauma insured events that may render a client TPD at a level of severity lower than that necessary to generate a trauma payment – for example, severe burns to the hands of a surgeon may not satisfy the trauma definition, but could render the surgeon unable to ever again perform the duties of their own occupation.
In risk insurance advice there are few absolutes, which again, is one of the imperatives for clients to have access to quality advice.
Well by this stage the party is likely well on its way, with attention firmly focused on “the person with all the interesting conversation”.
However, even if the party does not provide an improved social outcome, the questions and subsequent discussion may well provide an improved business one.
Col Fullagar is national manager for risk insurance at RI Advice Group.
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