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

October 17, 2019

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.

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