The Cost of Personal Protection – It’s All About Perception

How much resistance would we encounter if it cost our clients absolutely nothing to have appropriate types and levels of cover? None whatsoever, I fancy. So, cost is the only real barrier to people having appropriate personal protection. Therefore, anything we can do to lower the bar when overcoming the price barrier has got to be a move in the right direction.

When somebody tells you they’re ‘broke’, what do they actually mean? Technically speaking, the definition of being ‘broke’ is when your fixed outgoings i.e. non-negotiable expenses exceed your income net of tax, thereby leaving no disposable/discretionary income. The reality in most situations is that being ‘broke’ simply means that someone is overspending their disposable/discretionary income!

The first challenge is to enable our clients to prioritise the allocation of funds to their personal protection package over a lot of the other claims being made on their disposable/discretionary income. The second challenge is to get our clients to move the cost of their personal protection package out of the disposable/discretionary income category and into the fixed outgoings category. After all, if mortgage payments sit in the fixed outgoings category, then surely the cost of securing 100% Income Replacement in the event of illness, accident or premature death to enable the mortgage to continue being paid should also sit in the fixed outgoings category?!

This move from a needs-based analysis to a wants-based analysis revolutionised my life risk business

The way in which we achieve this outcome is to kick this thing called a “needs analysis” firmly into touch and replace it with a “wants analysis”. This move from a needs-based analysis to a wants-based analysis revolutionised my life risk business and turned what had historically been a “grudge purchase” for my clients into a “fantastic opportunity” for them.

Assuming you agree that people will get more enjoyment out of talking about what they want than out of talking about what they need, I believe it is crucial that you pre-position the wants analysis as early in the engagement piece as possible.

Therefore, hot on the heels of the Financial Services Guide at the introduction stage of the first client meeting and in order to enable the client to relax, it is essential that you establish and get agreement on the purpose of the meeting you are about to have. For me, doing this led seamlessly into a simple outline of the rest of my initial advice process and the basis for my recommendations. Here is how I sought to achieve this:

“My mission today is not to get you to tell me what it is that you would need to survive financially in certain ‘what if’ situations – I’m really not interested in that. What I am on  a mission to do is to help you tell me what it is that you would want in terms of financial outcomes in those same ‘what if’ situations, because once you have told me what financial outcomes you would want, I will be in a position to use my expertise to put together my recommendations for appropriate types and levels of cover that are specifically designed to achieve those financial outcomes you have told me you want and hopefully within an affordable budget – does that all sound reasonable?”

One of the concepts I used in the last 20 years or so of my advice practice was expressing the cost of my clients’ Personal Protection Packages, not as a dollar figure, but as a percentage of the income they are protecting. I can assure you that the client’s perception is that the percentage figure will always sound like less than the dollar figure and remember: perception is reality in the mind of the person doing the perceiving! I found the best time to introduce the percentage concept was when you get to the superannuation/retirement planning section of your fact find. When arriving at this point, I suggest you ask your client the following three questions:

Question 1: “What percentage of your income is currently being allocated to securing your income for after your working life?” I believe this is also an excellent way of describing superannuation to your clients as it provides an accurate description of what superannuation does for people rather than what it is. For most employed people, the answer to this question will be 9.5%.

Question 2: “Out of interest, what percentage of your income is currently being allocated to securing your income for during your working life?” This is an accurate description of what your client’s Personal Protection Package is designed to do, namely to secure your income for yourself in the case of illness or accident and for your family in the event of your death. The answer to this question for most people is 0% and for the others it’s nowhere near 9.5%.

Question 3: “Tell me, which of these income streams – after your working life or during your working life – is more important to you right now?”

What I was able to do at this point was to say:- “You may be interested to know that over the last 12 months my new protection clients have deemed it appropriate to allocate somewhere between 4% and 5% towards securing their income for during their working life. Do you think that might be an appropriate allocation of funds on your part?” What a powerful question, as it means that most people are allocating around half the amount of money towards the more important income stream as they are towards the less important income stream – sounds pretty reasonable to me!

This really has the effect of putting into perspective what the cost of your clients’ Personal Protection Packages really represents, and it enables you to sow the seeds for the percentage concept right up front. This means that whenever the spectre of cost rears its ugly head, you can revert to the percentage figure and not the dollar figure. For example, after you have asked the questions on the Fact Find around what financial outcomes your clients would want in specific ‘what if’ scenarios, a lot of clients would say to me:- “ Chris, this all sounds great, but what is it all going to cost?” To this I could reply:- “Well, I can’t give you a precise dollar figure off the top of my head, but given that most of the outcomes you want are not very different to the outcomes that most of my clients want, I have no reason to believe that the figure is going to fall outside the 4% to 5% I mentioned earlier. Does that still sound like a reasonable allocation of funds on your part?”

Having conducted the Wants Analysis (for details of the questions to ask see Session 4 of my online Risk Workshop), it is important to note that the ‘recommended strategy’ in the SOA needs to be for the types and levels of cover that would achieve the financial outcomes identified on the Wants Analysis and this is what I referred to as the “Platinum Package”. More often than not, the Platinum Package would need to be trimmed to accommodate the client’s budget, thereby becoming a gold, silver or bronze package from day one. The Platinum Package therefore becomes the aspiration of the client and we would need to identify which of the financial outcomes are non-negotiable and which are relatively speaking luxury outcomes that may become achievable when cash flow permits. An additional section of the SoA (which I used to call “Client’s Actions”) would then be required to detail what types and levels of cover the client is actually proceeding with which would include an explanation of the reductions/changes.

…always attempt to reduce the cost with minimum impact on the sums assured

When discussing ways of trimming the Platinum Package to accommodate the client’s budget, we should always attempt to reduce the cost with minimum impact on the sums assured, given that in the event of claim it will be the sums assured that create the financial choices. Therefore, apart from the sums assured themselves, there are a multitude of ways in which the cost of the cover can be reduced such as:

1. Modes of premium payment (stepped vs level)
2. Longer or split waiting periods
3. Own or any occupation TPD
4. Evaluating the relative merits of optional extras on the policies

Finally, when conducting client reviews (annually as a bare minimum), if the client’s income has increased, then an increase in cover may not actually represent an increase in ‘cost’, but just a maintenance of the same percentage of income going towards securing their income for during their working life as per the 9.5% to super for securing their income for after their working life.

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