A matter of life and death

There has been much discussion about the lack of life insurance being taken out by the Australian public. But this pales into almost insignificance when the focus is on risk insurance.

When you examine statistics that show only 6 per cent of Australians have income protection cover, the lack of risk insurance becomes apparent.

Whereas the life side of risk insurance is relatively straight forward, crisis insurance is by nature more complex.

For a start, there are three streams of products — trauma, term and permanent disability (TPD), and income protection. These provide overlapping cover, although one product will not provide complete cover.

The issue of affordability

In an ideal world the client will have all three streams of crisis cover plus life. But in the real world this is rare, mainly due to affordability.

AMP head of business development Chris Kirkby says affordability is a good part of selling risk insurance, but AMP has made the business simpler and more relevant for clients.

“We are trying to account for the issue of affordability and package the products accordingly,” he says.

“Consumers can see the value of complete coverage and a single solution will find favour, but it has got to be a simple solution,” he adds.

Kirkby says for the consumer the real issue is the value achieved in seeing the financial planner and receiving good advice.

However, the client’s cash flow and pre-retirement savings also have a significant impact on the affordability of crisis insurance.

“Clients do have affordability issues and the lack of funds to budget for solutions, but there are options for funding some of this insurance through superannuation,” he says.

“It is about working through the fact-find, and while there are lots of products available, some may not be relevant at this point.”

In some cases, occupational insurance might deliver more bang for the client’s buck, but the adviser will need to be selective about what they recommend on limited budgets, Kirkby says.

Lifestyle issues for consumers

Tower Australia head of risk products Michael Downey says making a decision on what crisis insurance products a client needs is influenced by what stage they are at in their lifecycle.

“A 20-year-old might want crisis insurance, as anybody between this age and 50 is justified in having this type of insurance. This could be income protection or TPD, because if they are not earning any money, how are they going to support their family?” he says.

“When they get to 55 there may not be the need for crisis insurance depending on their savings and investments.”

Downey says while there is scope to have the full package of crisis insurance for some clients, for others it will be difficult to afford four premiums.

Asteron sales development manager risk Kerrie Anderson says each client has a different set of circumstances, which is why different products will fit different situations.

“The adviser should give consideration to all types of insurance, but affordability and level of cover has to be taken into account,” she says.

“For example, income protection covers up to 75 per cent of salary, but that may not pay the mortgage and other debts.”

Know your client

Because not all crisis insurance products provide the same level of protection, the fact-find conducted by financial planners must be extensive.

“We are running workshops to help advisers look at the level of cover they should be giving each client,” Anderson says.

“The maximum cover can’t be afforded by a lot of clients, so the fact-find helps identify areas of concern that need insuring.”

Aviva general manager products Tim Cobb says the amount of cover depends on each client’s circumstances.

“If you take someone who is single without dependents, then TPD and income protection cover is important,” he says.

“If they get a critical illness, and can’t work, it may not be covered by other insurances.”

Cobb says knowing the client becomes very important and will help the adviser decide if the full range of crisis insurance products is needed.

“The adviser also has to bring affordability priorities into the equation, but that does put individuals off looking at risk insurance,” he says.

“The adviser needs to promote the importance of the products, which comes back to working with the client and discussing the affordability. I think most advisers provide a comprehensive range of products to the client rather than full cover.”

Income protection

MLC head of protection solutions Greg Einfeld says while each person’s circumstances will differ, most need income protection more than any other type of insurance.

“If the individual can only afford one form of protection, in the majority of cases it would have to be income protection,” he says.

“But there is no reason why most clients cannot have the full range, and consumers might like to think about getting cover through their superannuation fund.”

However, getting cover through standard insurance packages offered by superannuation funds can also mean the consumer is underinsured.

Einfeld says some of the aversion to crisis insurance is down to education and affordability, but he would argue insurance such as income protection is tax-effective and affordable.

“We could do a better job of selling that point,” he says.

“A lot of people hunt around for tax deductions at the end of the financial year and put their money into tree plantations, but income protection is a good way of getting a tax deduction.”

Einfeld says that while people can’t afford every area of cover, it is still better they have something in place.

“In some cases the cover does overlap, but more often not,” he says.

He explains: “Stress, depression and back conditions are covered by TPD insurance, but not critical illness. Heart attacks are covered by critical illness but not TPD. To have one [type of risk insurance] will not cover every situation.”

Selecting the right product

Einfeld says income protection insurance will cover the client for up to 75 per cent of their income, but if they have a heart attack and need to take six months off work they will need critical illness cover to pay some of the medical expenses.

Risk-Easy is a recently launched risk outsourcing service that provides both advice and administration in this area to more than 120 dealer groups.

Managing director Shaun Williams says it is true that the cost to the client will rise if they want all four components of life and risk insurance, but once again it boils down to the client’s needs.

“It depends on what is the long-term need of the client and the best solution to meet that,” he says.

“There is no iron-clad answer. There is no right or wrong answer.”

Williams says the key is having the critical questions answered and not allowing the client to drift away.

“The skill is having the knowledge of the client and then finding which of the 25 life company products suit that client,” he says.

“That is why not enough life insurance is being sold.”

Levels of cover

Anderson says it is important the adviser explains what the likely crisis could be and how the client will deal with that financially.

“Protection is about three things happening — illness, death and having enough money to clear debts and provide an income for dependants.

“If the client has a heart attack and can’t work for a couple of months, will TPD cover the debts and provide some money for the dependants?”

Anderson says trauma cover can be a bridging facility, as the client might not want to go immediately back to work and convalesce longer.

“Clients may also want alternative medicine to treat their illness or go overseas for the best specialist treatment,” she says.

“They expect cover to do this and cover taking their partner for support.”

Downey says that while a lot of advisers try to sell some crisis insurance such as TPD, they have a habit of over-insuring.

“I don’t think we need to insure everybody for $800,000 of crisis insurance,” he says.

“Crisis insurance does not have to be expensive, so clients can afford the premiums, and many will only need a couple of products.”

Some crisis insurance products come with differing levels of cover, so there are basic versions of the product and deluxe versions offering more protection. Kirkby says some products do cover more, as product manufacturers have tried to strike a balance between affordability and the robustness of a product.

“The planner has to organise a product that covers most events rather than taking the cheaper product,” he says.

“But these days there are a succession of product developments, and you get what you pay for with insurance.”

Kirkby says while financial advisers understandably recognise the more basic products, a lot of their choice is driven by research that can be flawed.

“The adviser ends up with a quantum range of products on an approved list, but they have got to ignore the list and find the product that fits the client’s needs,” he says.

“We have also got to give the advisers a better understanding of how products are researched and valued.”

Package deals available

Another solution to problems of affordability is for the client to buy a suite of products from the one life company.

Cobb says Aviva offers reductions on people taking out more than one policy.

“We have the same PDS [product disclosure statement] and application forms for clients who want to take out a number of policies at the same time,” he says.

“It is all about making it easier for the client and the adviser.”

The suite of products under one PDS has also probably delayed, if not killed, the arrival of the single product covering all four areas of risk insurance.

“I think the efficiency of creating one application form and making choices from it has happened before the one product to cover all areas,” Cobb says.

“The other problem with one product is that some areas of risk are treated differently for tax, and some can be in a superannuation fund while others can’t.”

Downey says Tower has tried to put all components of risk insurance into one product up to a point.

“Everybody knows it would be a good thing to do, but two things have stopped it,” he says.

“It would be quite complicated and cumbersome, and it would always end up very expensive.”

Downey says Tower is pushing the suite of products approach that is easier for the customer and the adviser.

A single premium offering

According to Einfeld, MLC has put the four areas of risk insurance into one product called Personal Protection. It works using one PDS and one premium, and deals with the taxation issues of the various components.

“We divide up what part of the premium belongs to which policy,” he says.

“MLC will allocate the monies, so if 60 per cent of the cost of the premium is life cover and the rest income protection, we will split the premium and record this on the statement to enable the client to make the appropriate tax deductions.”

Kirkby says AMP has found it very difficult to create one product, but a step in the right direction is packaging the products into a single application with one single underwriting process.

“But there are complex strategies involved in risk insurance and we have to avoid complex solutions so the clients can understand,” he says.

Insurance regulation

But while a single product that offers affordability and client awareness of risk insurance is an issue that needs examining in order to reverse the low take-up of product, there are still some fundamental problems in the regulation of risk insurance.

CommInsure managing director Simon Swanson says the perception of being unable to afford risk insurance can be overcome by telling the client they can afford a cup of coffee a day, and that is how much the premiums equate to.

But Swanson says the real problem is the regulatory burden now facing risk advisers.

“The regulation regime means it takes four hours to find out the facts from the client,” he says.

“We have got to change underinsurance, and it is the regulatory regime that makes risk insurance expensive.”

MetLife head of investments Richard Collis says affordability of risk insurance is heavily influenced by the Financial Services Reform (FSR) regime.

“Compliance has added to the cost of advice, and risk advisers are not undertaking fact-finds unless there is a good chance of some revenue from a product sale,” he says.

“So you are getting middle Australia underinsured.”

Collis says there is no shortage of people wanting to buy insurance, it is just that advisers are faced with complex and expensive compliance burdens, which results in them looking for simpler forms of business to deal in.

“There are lots of people who can afford risk insurance, and they are not buying it,” he says.

“Then we have a larger proportion of the population who need risk insurance and can’t afford it. So we have to make the process simpler to bring the costs down, but advisers still have to go out there and sell products, as risk insurance is sold not bought,” he adds.

Swanson also believes the industry has got to be more responsive to the client’s future needs.

“We must create segmentation of products that fit the generations, such as X and Y,” he says. “In the future we will see different products that fit that customer segmentation, but we must bear in mind that when we make the products simpler the costs go down.

“In the long-term, we will see the US-style of universal life products, which we are looking at, but that is not for the present.”