Making Compliance Work For You: The Elements of Valuable Life Insurance

BT’s Crissy Demanuele explores some of the fundamentals around the provision of life insurance advice from the perspective of working within the regulatory guidelines required of advisers…

 

Making Compliance Work For You: The Elements of Valuable Life Insurance Part 1

Navigating regulatory or compliance frameworks can be onerous; however, they can also provide useful guidelines on providing valuable advice that can win clients’ trust and build relationships that last.

Financial advice is classified as ‘personal advice’ when the person giving the advice has considered one or more of the client’s objectives, financial situation and needs; or a reasonable person might expect the person giving the advice to have considered one or more of these matters. How does this definition of personal advice apply in practice to life insurance advice specifically?

Across three different articles, we will break down some of the considerations which can form part of personal advice in relation to a client’s life insurance needs, including:

  • Premium comparisons
  • Relevant product features
  • The amount of cover required to meet the client’s financial goals
  • Underwriting pre-assessments
  • Previous claims history
  • Ratings from research houses

The various elements of life insurance advice which this three-part series will cover are also the subject of ASIC’s review of retail life insurance advice, REPORT 413. However, instead of taking a compliance perspective, we will take a practical approach, and focus on providing advice that clients may perceive as adding value.

In this first article in the series, we will consider premium comparisons and relevant product features.

Premium comparisons

Premium comparisons may involve obtaining a quote for the first year’s premium, but it should also include future projections of premiums.
If the premium includes any upfront discounts which may expire at some time in the future, this should also be considered as part of the comparison, and these discounts should be explained to the client and should be documented as part of the statement of advice.

Any advice provided should also consider whether the client is better suited to paying stepped, level or hybrid premiums.

Stepped premiums

Stepped premiums increase as the client ages, to reflect the higher likelihood of a potential claim. Stepped premiums have lower upfront costs over the short term. However if the client continues to hold their policy, as they age, stepped premiums increase, sometimes significantly.

Level premiums

Level premiums remain stable from policy commencement until the client reaches a predetermined age (e.g. level to age 55 or age 65), at which point the premium converts to a stepped premium structure. There may be increases to level premiums over time due to indexation or other increases to the sum insured.

Level premiums usually have higher upfront costs than stepped premiums at policy commencement. This is because the increased risk of claim as the insured person ages has been factored in, with premiums being averaged over a period of time.

Hybrid premiums

Hybrid premiums allow the client to use stepped premiums for a portion of cover, together with level premiums for the remainder of cover. This allows the premium structure to be aligned to short-term or long-term needs within a single policy. Factors such as the client’s age, affordability of the premiums, and how long the client may be expected to hold the insurance cover, may form the basis for choosing either stepped, level or hybrid premium payments.

Example

Janine is single, aged 28. After discussing her circumstances with her financial adviser, it is decided that she requires income protection (IP) insurance and that she will most likely require the IP cover for most of her working life. She expects to work until she is age 65.

In this case, level premiums may be more affordable over the life of the policy. By choosing to have level premiums, Janine may be more likely to retain the cover indefinitely and not cancel it later on in life, when it may become even more important for her to have the cover in place. However, if she chooses to have level premiums, the premiums will be more expensive in the earlier years of the policy.

Example

James is married and is 55 years of age. He currently has a mortgage of $80,000 which he expects to pay off over the next three years. After discussing James’ circumstances and goals with his financial adviser, it has been decided that James needs to have term life insurance of $80,000 to cover the debt.

However, once the mortgage is repaid, it is decided that James may not require the term life insurance cover. For this reason, it is decided that James should have stepped premiums.

Relevant product features

The product features that a client may need will vary depending on the client’s circumstances and their financial goals. Some insurance products automatically include additional features, whilst other products allow clients to add on features as they require them. Research into different products should include a detailed understanding of the features included in the product, and whether or not these features meet the client’s needs and objectives. The advice should consider which features are relevant to the client’s individual circumstances.

For example, the product may include a future insurability benefit which allows the policy owner to increase their cover in the future without further medical evidence, when a specific personal or business event occurs. Depending on the client’s age and what stage of their life they are in, this may be an important benefit for the client. It may also be an important feature for a client who has their own business. For some clients, this may be a feature which is not relevant to them.

A note on income protection

If it is established that a client needs income protection cover, the advice provided needs to consider certain factors the client may need, based on their circumstances. These factors include the appropriate waiting period, benefit period and type of monthly benefit (indemnity, agreed value or endorsed agreed value).

Conclusion

When providing advice to clients regarding their life insurance needs, the advice should consider the client’s ability to pay the premiums and the product features which are relevant to the client. This may take into account any existing cover the client already holds. The advice may also vary depending on whether the insurance is to be held inside or outside superannuation. In part two of this series on valuable life insurance advice, we will focus on the amount and types of cover that a client may require, and whether the insurance should be held inside or outside super.

Making Compliance Work For You: The Elements of Valuable Life Insurance – Part 2

In this the second of a three-part series, BT’s Crissy Demanuele considers more of the fundamentals of life insurance advice through the lens of regulation and compliance. She pays particular attention to ASIC’s October 2014 Report 413 Review of Retail Life Insurance Advice and outlines why advisers need to heed the content of this report.

 

In this article, we continue to break down the elements of valuable life insurance advice. We turn our focus on requirements regarding the amount and types of cover, and whether the insurance should be held inside or outside super.

As discussed in the first article of this series, navigating regulatory or compliance frameworks can be onerous; however, they can also provide useful guidelines on providing valuable advice that can win clients’ trust and build relationships that last.

Across three different articles, we discuss some of the elements of life insurance personal advice advisers may weigh up when assessing a client’s life insurance needs:

  • Premium comparisons
  • Relevant product features
  • The amount of cover required to meet the client’s financial goals
  • Underwriting pre-assessments
  • Previous claims history
  • Ratings from research houses

These various elements of life insurance advice are also the subject of ASIC’s review of retail life insurance advice, Report 413. However, instead of taking a compliance perspective, we take a practical approach, and focus on providing advice that clients may perceive as adding value.

Amount and types of cover

According to ASIC Report 413, an adviser should keep documented evidence of the advice provided which explains how the recommended sum insured may meet the client’s needs and objectives.

There needs to be engagement with the client to help them arrive at the right type of cover that is appropriate to their individual circumstances and also affordable for them over time. This is the ‘value add’ of life insurance advice to a client.

It may be appropriate to consider whether life insurance cover should be held inside or outside super. The most appropriate solution for the client may depend on factors such as:

  • The types of cover and product features the client requires
  • The definitions of the products available inside and outside super
  • The client’s retirement savings goals
  • Tax effectiveness of holding the cover inside super
  • The client’s health status
  • The client’s beneficiaries

Where it is established that it is appropriate for the client to hold insurance inside super, but the client requires a type of insurance cover or features which cannot be held inside super, super-linking could be considered. Super-linking allows certain types of cover to be held inside super, whilst being linked to cover which is held outside. This generally allows most of the premium to be paid from within the super fund.

Example

Simon is single, aged 32 and owns his own home, which has a mortgage over it. He is working full-time.

Simon’s financial adviser recommends that he take out income protection (IP) cover with features such as crisis benefit and also own occupation total and permanent (TPD) cover. To assist with his cash flow, he is also advised to take out the cover inside his super fund. However only basic IP cover and any occupation TPD cover can be held within super.

Simon’s adviser suggests that he take out IP cover inside super, and link it to IP cover outside super with additional features. He also suggests that Simon hold ‘any occupation’ TPD cover inside super, and link it to ‘own occupation’ TPD cover outside super. Under this arrangement, most of the premiums can be paid from within super, and Simon can still have the types of cover required to meet his needs. Simon is also advised to set up salary sacrifice contributions into super which allows him to pay the premiums inside super in a tax-effective way.

Conclusion

Advisers should keep documented evidence to show why they recommended a particular insurance product over other products. It is also necessary for advisers to understand their clients’ circumstances, financial goals and objectives. Detailed file notes should be kept and the client’s statement of advice should include a description of their individual circumstances.

This will then allow advisers to tailor their advice for each client, and match their needs to product preferences, after the adviser has conducted reasonable research into different products. This will result in a solution which provides the best fit for the client.

Advisers should also consider the types of insurance and levels of cover which will meet the client’s goals and objectives.

In the final article of this three-part series, we will discuss underwriting pre-assessments, clients’ previous claims history and research houses’ product ratings.

Making Compliance Work For You: The Elements of Valuable Life Insurance – Part 3

In this article, the final in a three-part series, BT’s Crissy Demanuele continues to break down the elements of what constitutes valuable life insurance advice, turning her focus on research comparisons and underwriting pre-assessments…

 

In the first and second articles in this series, we discussed the following factors which advisers may weigh up when assessing a client’s life insurance needs:

  • Premium comparisons
  • Relevant product features
  • The amount of cover required to meet the client’s financial goals

We now round off our discussion with a look at how research comparisons and underwriting pre- assessments can assist advisers in the life insurance advice process. We will also discuss how advisers can gain a better understanding of how claims may be handled in the future by considering the previous claims history of different insurance providers.

These various elements of life insurance advice are also the subject of ASIC’s review of retail life insurance advice, Report 413. However, instead of taking a compliance perspective, we focus on the practical steps that can be taken to ensure that life insurance advice is well-researched and considered – and when advice is presented in this clear and comprehensive way to clients, they may appreciate the benefits of obtaining tailored financial advice more easily.

Research houses

Ratings houses and risk researchers provide tools which can assist advisers with comparing different insurance products and product features, including legacy products which clients may currently have. Generally speaking, risk researchers will score products based on certain variables. A higher score potentially means that the product may be more comprehensive.

Business development managers and other support staff at insurance providers may also be able to assist advisers, as they can explain the product types and features in detail.

Underwriting pre-assessments

Underwriting pre-assessments can provide advisers with an upfront indication of how a client may be underwritten based on any medical issues they may have, their financial details, occupational assessments, as well as their pursuits and pastimes, travel and residency. Obtaining an underwriting pre-assessment can potentially assist in deciding whether one product or another is the best fit for the client. Pre-assessments may assist to form part of the decision as to whether or not the client should change to a new product provider.

In some instances, clients may have existing cover in place which was taken out when they were fit and healthy, with no exclusions or loadings; but since taking out that policy their circumstances may have changed. If they take out new cover, they may only be offered cover on substandard terms, or may have a loading or exclusion applied to their cover. Their occupation and/or financial details may have also changed, and this may result in them being offered lower levels of cover. For example, they may now have a chronic bad back, and if they were to take out new cover they would have an exclusion on the new policy.

However, pre-assessments are just part of the overall picture, and an underwriting pre-assessment alone should not be the only deciding factor. Obtaining pre-assessments from different underwriters should not necessarily be prioritised over obtaining and setting up the insurance. It is more important for clients to have the appropriate cover in place as soon as possible. It’s also important to note that, while pre-assessments can be informative in the decision-making process, they are not binding.

Previous claims history

The claims history of different providers may also provide an insight into the likelihood of an insurance provider paying claims in the future. The ASIC Moneysmart website provides a tool which compares how life insurance companies have handled claims and claims-related disputes in the past. This includes the policy cancellation rates. This may provide some guidance on whether one insurance provider may have a stricter policy definition, for example, or may provide some insight as to how long a particular insurer may take to pay out claims.

Click here to access the ASIC MoneySmart claims comparison tool.

Conclusion

When providing advice to clients in regards to their life insurance needs, advisers must conduct reasonable research into various life insurance products. This may include information gathered in relation to how a client may be assessed from an underwriting viewpoint. It is also necessary to understand the client’s circumstances, financial goals and objectives.

There needs to be documented evidence to show why a particular insurance product was recommended over other products. Particularly where an in-house product is being recommended, the advice documentation must include evidence as to why that product is more suitable to a client than other products. Advisers need to keep detailed file notes and ensure that the client’s statement of advice describes the client’s individual circumstances.

Research tools and the claims history of different insurance providers may assist when comparing different product providers.

Across three articles, we have considered the fundamentals of life insurance advice through the lens of regulation and compliance. While regulatory or compliance frameworks require careful navigation, they also provide useful guidelines on providing valuable advice that can build trust and lasting client relationships.

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