We have all heard the stories where someone fit and healthy today becomes injured or unexpectedly ill tomorrow.
And how many times have you heard of a friend or client who cancelled their life insurance policy because it became unaffordable? Unfortunately for many it happens all too frequently and often when the cover is likely to have been needed most.
Contemporary guaranteed renewable style products provide consumers with a choice of how their premiums are calculated for example, a stepped or level premium.
However, the stark reality is the vast majority of new policies are still sold on a stepped premium basis.
Many insurers have failed to adequately market and promote the options, and many advisers have failed to educate the client and place a choice on the table.
As a result, many consumers are unaware of the differences and, importantly, the consequences of the decision.
Sadly, the old adage of a ‘short-term solution to a long-term problem’ is alive and well.
Stepped versus level premium
So what is the difference and why is making the right choice so important? A level premium is calculated based on a client’s age when they take out a policy and a stepped premium for the same cover increases over time, as it is based on the client’s age at each policy anniversary.
So while a stepped premium is appealing as the cheaper alternative in the short term, the cost can quickly become prohibitive in the longer term as the client gets older.
Most Australians are now starting families later, carrying larger amounts of debt for longer, retiring later and even living longer, so the need for long-term insurance has never been greater.
Sadly, the industry has been slow to adequately respond to these changes and the impact of the issue is very real.
Consider that life insurance policies are typically purchased by people in their mid to late 30s and that the average lifespan of a policy is around seven to eight years. Contrast that to the actual claims experience of many insurers, which will usually show that many claims occur when clients are in their 50s and 60s.
What we are experiencing as an industry is a fundamental misalignment between when the cover is being purchased, how long it is being held and when claims occur.
One of the key factors driving this behaviour is that the premiums on those stepped premium policies are generally increasing at more than 10 per cent per annum (with increases getting larger at older ages) until eventually the increases reach a point where the policy becomes unaffordable.
Take action
As an industry, we have an obligation to take action.
Most insurers now provide a choice between stepped and level premiums, so these options should be explored.
Advisers can take some practical steps to ensure their clients have the best chance to retain the cover for when they need it most.
Choose the right product
Consider products that provide flexibility to add or alter cover as required without requiring applications for a new policy.
This means looking for products that are regularly upgraded with new sustainable product features or pricing improvements to ensure any long-term policies are kept current with the market.
Be cautious of policy series that are on sale for short periods of time but are then closed to new business and quickly forgotten.
Choose the right premium structure
Place greater emphasis on affordability for the client in the long term.
For example, in 10 years time, is the client likely to be able to meet the cost of a stepped premium? Address these cost issues upfront through a level premium policy or offer flexibility through a combination of stepped and level premiums.
Processes vary between insurers, but moving existing clients from a stepped to level premium typically requires no further underwriting.
Choose the right strategy
Take a long-term view of the client’s needs.
What is the best approach to providing protection now and in 20 years time?
Consider trade offs such as extended waiting periods for income protection insurance, a 90-day wait rather than a 30-day wait for example, to address short-term affordability concerns.
We are also fortunate as Australians to have a long-term retirement savings vehicle in the superannuation system and this can be used for holding insurance cover.
Insurance held within superannuation can provide potential tax benefits for the client as well as assist with overall affordability by reducing the impact on disposable income.
Choose the right insurer
Select an insurer with financial strength, a commitment to the local market, a demonstrated history of stable premiums and payment of claims, and, importantly, a choice of premium structures.
Where to start?
Advisers can make the long-term insurance discussion part of the initial client conversation.
For existing clients, advisers can use the next review to discuss their situation and alternatives for the long term — the sooner the better for long-term affordability.
The advice provided should offer clear choice and any insurance cover should reflect not only the client’s short-term affordability needs but their long-term protection needs as well.
When considering insurance for the long-term it can be thought of like this: you wouldn’t purchase a house, car or investment portfolio by considering price alone, nor should you when it comes to insurance.
David Evans is the head of individual risk at MLC.
