Breaking through the ‘reasonable benefits’ barrier

Col Fullagar

A client’s financial plan may be exposed to risk if certain unforseen events occur — death, sickness or injury, total and permanent disablement (TPD), or a major medical trauma.

The role of the financial planner is to gather and analyse information about the client so they can ascertain where the client’s financial plan is exposed, to what extent it is exposed, and what recommendation has to be made to minimise that exposure.

Each client will have unique circumstances, so each analysis will be different. However, there should be a logical basis for the recommendation so the adviser can justify the advice provided if a challenge is ever mounted.

Safety in advice is a factor of ‘how’ not ‘how much’

So, for example, if the death of the insured threatens the lifestyle of their family, sound advice would provide a lump sum by way of a term insurance policy, sufficient to replace the insured’s income.

If the insured being unable to work because of a sickness or injury threatens the lifestyle of the insured and the insured’s family, sound advice would provide a regular revenue stream by way of an income protection insurance policy, sufficient to maintain the lifestyle of the insured and the family.

If sickness or injury could result in an accumulation of expenses by a self-employed insured who is, therefore, unable to work, sound advice would provide for the payment of the ongoing expenses by way of a business expenses insurance policy.

With each of the above, the quantification of the insured’s exposure is either relatively objective, or alternatively, reasonably robust — and generally accepted formulae exist such that a justification of the recommended benefit amount can be provided.

The position is currently quite different when trauma insurance is considered.

The purpose of trauma insurance is to provide a lump sum payment if the insured suffers a major medical trauma so that the insured can achieve what’s needed at that time.

This may be to obtain the best possible medical care, to gain access to rehabilitation, or to make any desired lifestyle changes.

Other needs could also arise that are less predictable and that may depend on and reflect the type of illness or injury suffered. So how to cater for this?

At this point, things become quite a challenge.

On what basis can an adviser logically calculate a reasonable benefit recommendation?

For example:

~ two times gross income?

~ two times gross income plus all debts?

~ two times gross income plus $50,000 for medical expenses?

~ two times gross income plus $25,000 for a holiday?

And why two times gross income, why not 1.5 or 2.5?

A study of trauma insurance recommendations will reveal that the list of formulae varies widely and is relatively endless.

This should cause concern because the lack of an objective or consistent basis for calculating a reasonable benefit recommendation increases the chances that a successful challenge could be mounted if, at the time of a claim, the insured finds they are not appropriately covered.

To overcome this problem, it is first necessary to understand the problem.

With term, TPD, income protection and business expenses insurance, the impact of one of only two insured events is considered, that is, sickness and injury, and one of these two events must create a defined outcome: death; total and permanent disability; or an inability to work.

As a result, the impact of the insured events of sickness and injury are more easily able to be quantified.

With trauma insurance there are around 45 insured events, some of which, cancer for example, have many sub-events; for example, in the case of cancer there are around 300 different types.

Thus in trying to quantify the impact of an insured event it is difficult to the point of impossible to be precise or even come close if traditional logic is used.

While it is beyond the scope of this article to suggest any detailed basis of benefit amount calculation, there are some pointers that should be kept in mind.

(i) Approximately 90 per cent of all trauma insurance claims are as a result of cancer, heart attack and stroke.

Thus it may well be considered sound advice to focus on the impact of these rather than considering the impact a loss of speech might have on the insured.

An exception might be if the circumstances of the insured were such that another insured event might need to be considered, for example, paralysis for a footballer or dementia for an older insured.

(ii) Many recommendations are ultimately decided on price.

So if the insured cannot afford what they need, sound advice requires the adviser to not only be able to say what is likely to be ‘spent’ but also what is likely not to be able to be ‘spent’ at the time of claim.

(iii) While ‘the best possible medical care’ and ‘rehabilitation’ are terms that will generally be understood by clients, notwithstanding ‘change of lifestyle’ sounds simple, it may in fact, without further explanation, mean one thing to the adviser and quite a different thing to the client.

Therefore, it would be prudent to break it up into its various components, for example, be debt free, retire early, take an extended holiday, and so on.

(iv) In the absence of a logical or robust formula for calculating the recommended benefit amount, the adviser should consider making this fact known to the client in the Statement of Advice.

A subsequent statement can justify the benefit amount on the basis of “from my experience clients look to allow $X for medical and rehabilitation expenses and, in addition, in your case, we have allowed $Y for the designated lifestyle changes”.

In the meantime, perhaps some research should be undertaken and the ‘facts of trauma’ distributed so advisers can be better equipped to calculate the trauma insurance benefit amount.

Col Fullagar is a risk manager at GenesysWealth Advisers .