Shifting to level premium policies not always right
Many advisers moved clients onto life insurance level cover in the run up to law reform in July because of premium hikes, however Triplejump believes this was not necessarily in the best interest of clients.
Thursday, September 2nd 2010, 12:11PM 
42 Comments
by Jenha White
Triplejump chief executive Cecilia Farrow said she had seen "shocking" advice given to clients and based on anecdoctal evidence, there were many cases where clients were shifted from yearly renewable term (YRT) contracts to level contracts, lock, stock and barrel.
She said the worst case seen recently was a one-pager that had been written by an adviser to a couple who were in their later years and being farmers, had reasonably extensive debt. The one-pager urged the client to consider changing all their term cover over to level with a table showing that the client would save close to $500,000. The quote was for Level to age 80 without CPI, however the YRT was quoted on CPI.
"Now as far as I'm concerned that brings our industry into disrepute and it is that kind of behavior that goes on which is a concern," said Farrow.
She has had a few working parties investigate the YRT versus level paradigm and as a result the advice Triplejump has provided among its franchise network is that it is very hard to find an argument that supports the idea that customers are better off paying a level premium versus a rate for age premium balancing all the other considerations that should be taken into account in providing advice to clients.
Farrow explained that advertising for level promotes the concept that the age at which the level and YRT premium ‘cross over' is the point at which the client is ‘in the money' or better off with level premium.
"However, these graphical illustrations do not take into account the opportunity cost of the clients paying substantially more in the early years," said Farrow.
"Depending on the clients situation this cost of capital could range from lost opportunity to invest and grow wealth through to lost opportunity to reduce debt at a faster rate and therefore save interest."
Farrow said the cost of capital can make the point of crossover significantly longer, therefore making level cover less valuable.
She said for example, in the first 11 years of comparison, if a client who had a $300,000 table mortgage applied $200 per month of the difference in premium between level and YRT they would pay off their mortgage four years earlier and save $72,000 in interest.
If the client had no debt and saved $200 per month in addition to their current Kiwi Saver scheme at an average return of 2.5% net they would accumulate additional savings of $35,000.
She believes it is in the client's best interests to protect the financial risks they face for the least cost they can.
Farrow said advisers should be helping their clients reduce debt as fast as they can to minimise the cost of borrowing, maximise the value of their capital and to help them accumulate wealth to provide for their future.
"I think most clients would prefer to reduce debt than pay more for insurance than they need to."
She outlined that for advisers to provide best advice they should have a relevant risk management philosophy, recognise that most clients have a need to protect and accumulate and they should use appropriate analysis processes to work out the real cost of choices.
"Advisers should present the possible range of solutions accurately and provide the best solution balancing the medium to long term goals and needs of the client," she said.
Jenha is a TPL staff reporter. jenha@tarawera.co.nz
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Comments from our readers
On 2 September 2010 at 5:34 pm billy the broker said:
Obviously Cecilia just deals with people who have major debt.What happens when interest rates change does that throw all her calculations out the window. At least insurance is certain. She should stick with her knitting. On 3 September 2010 at 11:14 am Unbetn said:
Always easy to 'grandstand' and criticise. What, I wonder, does she tell her 65 year old clients who have to cancel their cover because it is too expensive? In my experience, a client who has been forced to do just that usually asks why nobody ever advised them about level cover in the early years. My own children all have $300,000 level cover, and one day it will be the best cover they have ever bought (even though I am paying at the moment!). The purest always debates the maths, when they should actually consider human nature. On 3 September 2010 at 11:16 am Mark Jory said:
I think Cecelia is absolutely correct with the specific example she has provided. That is extremely misleading to include CPI adjustments on the yrt example but not on the Level Premium example.
In most cases clients will NOT be better off to transfer ALL of their life cover to a Level Premium, for all the reasons stated by Cecelia.
If clients have no intention to retain any life cover after age 65, it is also unlikely to be in their best interests to change to a level premium beyond age 65.
However if clients do want to be certain of having some life cover in place to cover final expenses, or provide some sort of cash benefit/estate to their heirs or a charity, a level premium life insurance policy may well be the best option in terms of overall cost.
Most of the clients that I changed to Level Premiums were for final expenses 'type' funding with amounts of $20,000 - $100,000 changed to Level premium to age 80, and the balance of their existing life cover remaining on yrt rates.
On 3 September 2010 at 11:26 am Chris Louisson - RMS said:
Completely support Cecilia's position. We crunched the numbers some years ago and found that on average, the 'true' break-even point was around 19 years when taking into account opportunity cost, present/future dollar value, and of equal importance, the accumulated premium rather than the crossover point at which YRT premiums become greater, which most illustrations we’ve seen do not seem to illustrate. On 3 September 2010 at 11:31 am Chris Louisson - RMS said:
Further to previous, Level Term does have its place i.e. succession planning, but that's not the point in case. The question is; does level term save money, and the answer seems to be yes, after about 19 years. On 3 September 2010 at 11:32 am Paraplanner said:
So should you "billy the broker" - stick to your knitting. If you don't understand what Cecilia is saying then; a) Only quote YRT, b) Only recommend cover for debt and final expenses, c) Leave the comprehensive stuff to client focused financial advisers. On 3 September 2010 at 11:42 am Garth Clarricoats said:
Cecilia makes very good sense. I have seen a number of advisers "switch" cover using the standard fear strategy used so many times in the past, without xonsideration of the clients' specific needs; such as whether the entire cover should be level, whether there should be a mix of level and stepped or even whether the level premium policy sold would ever get to the "break even" point.
When comapnies started promoting the "transition" to level as a means of avoiding the price increase one adviser I would love to name was quoted as saying "Now I know where the new car is coming from."
While many advisers will have given appropriate advice and offered credible solutions based on effectve needs analysis, there are still a sad few whose lip service to ethics and good practice are ashes in the mouths of those who work in the best interests of their clients.
On 3 September 2010 at 11:45 am Graeme Lindsay said:
Cecilia and Chris are correct! We too have done the analysis and concur with Chris' points. If the analysis doesn't take the time value of money into account, it is flawed! Advisers must understand the Nett Present Value or Discounted Cash Flow concepts and apply them when comparing different cash flows. To not do so could be tantamount to fraud.
I take issue with the comment above by Unbetn - human nature NEVER makes fraudulent advice acceptable, and if that makes Ceceila, Chris and myself into Purists (as opposed to purests), then so be it. I can live with the title.
I believe that this headlong rush by advisers promoting level premium to age 80 to be ill-advised and even foolhardy. I hope for their sake that their Professional Indemnity insurance covers potentially fraudulent advice.
I thiink that Mark Jory's view has merit - the notion of long term cover for "core" needs makes sense, and I used Whole Life cover in that way in the old days; but, the selling of level term as "cheaper" than YRT without taking the time value of money into account cannot be in the client's best interest, Not ever!
On 3 September 2010 at 11:45 am GB said:
I agree with Cecelia that simply transferring 100% of yearly renewable cover to level would almost always be poor advice regardless of the cash flow of the client due to the long term opportunity cost of paying higher premiums until the break even point. There were however considerable premium advantages in fixing premiums prior to 1 July either on a level to age 80-100 or 10 year fixed premium. However if a long term view was taken which usually involved a dual approach to life cover in that a portion of cover was left yearly renewable with cpi and a portion fixed. The yearly renewable cover deals with the short to medium term needs of the client and the fixed the long term needs assuming life cover past retirement is desired. On 3 September 2010 at 11:48 am Paraplanner said:
Good on you Graeme!!! On 3 September 2010 at 11:56 am Andre said:
Level premiums have been around for a while now. Clients who we changed over in 2004 have already broken even. They are in their early 50s. So they have life now until the age of 80 years old - guaranteed. The point that should be made to clients is that the premiums are guaranteed and who knows what the future holds with the insurance industry and government regulations. One thing is for sure, we will all require final expenses - so what is the clients best option? Yes, advisors should be providing the correct information - I have a problem with advisors changing level to age 80 life cover policies back to rate for age - just like an advisor from Triple Jump did with a client we know. Is this working in the clients best interest or just getting it back on commission paying basis? On 3 September 2010 at 11:57 am Paraplanner said:
Good on you Graeme! These people need to understand THEIR fiduciary duty as well as THEIR commission tables, and find the win/win for clients and advisers. On 3 September 2010 at 12:17 pm alison renfrew said:
I was busy converting clients to level premiums prior to 31 June. My clients are generally not business owners. I encourage the majority of them to wean themselves off insurance by the time they are 65. At some point we aim to stop paying for insurance because we have built up our asset base and can self insure. Obviously, if your retirement age is 65 this is the time you would plan to be weaned off insurance. It is not always the case. We all have different needs as well as beliefs on how much we are prepared to self insure.
My clients in their 50's have seen their insurance premiums increase increase significantly, often by more than 30%, over the last few years. It was an absolute no brainer to switch them over to level premiums to age 65. If they were unhappy having premiums increase from $498 per month to $850 per month in two years imagine how 'unhappy' they would have been when they had soared past $2,500 per month. The question became: When will you choose to stop paying the premiums? Averaging the premiums out makes a lot of sense. What's all the fuss about?
With regard to Cecelia's quote from another advisor it might have just been a mistake - not deliberate. It's so easy to forget to remove CPI from quotations. Mind you there are a lot of features and benefits some advisors 'forget' to include when making premium comparisons. A client recently moved his insurance from my firm to another because he said he got the same deal for half the price - yeah right. Another client was angry with me because his new advisor showed him how he could have saved $250 per month if he had been insured with another company. When I compared the premiums with the insurance company he moved over to there was only a $30 per month premium difference. Through my firm he was insured with a company that scored highly with independent research firms Plantech and Strategy but the company with the $30 lower premium was in the bottom quartile of insurance companies. I think some advisors must be incredibly thick or dishonest to find a $250 premium differences between products and claim they are the same. Even a highly respected franchised insurance advisory firm moved a client of mine, who is a business owner and receives dividend income, from Platinum which does not offset dividend income to another company the name of which I don't know. I fear for those people who move their insurance from one company to another not knowing what they are losing (such as dividend income offsetting benefit income. I would love to read the 'advice on replacement business'form the new advisor had to complete. It must contain lies and inaccuracies but my former client has no desire to dig it out. The trials of an insurance broker continue don't they? What I have found over the years however is that there are usually two sides to a story. Very often we only hear one side and cast a judgement based on it alone. Be very careful when you judge other advisors!
On 3 September 2010 at 4:46 pm unbetn said:
Thanks Graeme for correcting the typo! Alison, good to see some real debate, I agree with you. I do take accept ion to the use of ‘fraudulent advice’. As I commented it is easy to ‘Grandstand’. I for one get fed up with people who try and confuse a simple issue, such as Mr Louisson who stopped selling insurance years ago. Life insurance is simple, to provide cash if it is needed when somebody dies. The only question is, how long is the policy likely to be needed for? Cecilia basically ‘bagged’ level cover , she did not attempt to enter a debate, but simply placed herself on the ‘moral’ high ground and by implication, anybody who disagrees must, ipso facto, be less moral. Anyway, down here at the coal face, where none of the triumvirate of Messrs Lindsay, Louisson or Ms Farrow are, we deal with real people with real problems and provide them with real solutions. On 3 September 2010 at 6:34 pm Graeme Lindsay said:
Whilst I am not a full time adviser, I feel that 41.5 years in that role does give me some insight into the issue. I have dealt with many "real people" in real situations over the years Unbetn, and most cannot afford all the cover that they need today, let alone paying in advance for cover that they might want/need in later life.
My point was and is, that unless the cash flows used by advisers take into account the time value of money, in the way that Cecelia does in using the example of the client reducing debt, then the comparison is flawed!
I think too that Garth's comment about the adviser's new car is too close to the truth for many who have promoted the Level Premium model.
In addition, I feel that some insurers' BDMs have acted with less than acceptable levels of integrity in promoting level premium to age 80 to the advisers who have brought into it.
I also find it intriguing that the two who have commented criticising Cecelia (and the others who agree with her view), hide behind pseudonyms...
And, Unbetn, I think that another typo crept in - your "acception" should have read "exception"...
Further, I stand behind my comment about "fraudulent advice". It is shoddy and potentially fraudulent advice such as is referred to in the posts above, that gets financial advisers the the disrepute that has prompted government to bring in the new regulations that we currently face! The more that such bad advice is allowed to go unchallenged, the sooner insurance advisers will be dragged into the AFA world!
On 3 September 2010 at 10:12 pm Unbetn said:
Graeme. I take your point. I think my own stated argument may not be apposite. The advantage of a pseudonym is that one is free to challenge without personal recriminations. On 4 September 2010 at 7:43 am Denis said:
It look likes Cecilia has hit a nerve. My adviser wasn't pushy. He mentioned it to me but I like the fact that my cover increases every year. It was the main reason why it was set up that way.
On 4 September 2010 at 11:17 pm Mark said:
The truth of the matter is their is no "right" answer, it depends on the clients personal situation.
The risks are:
Some may forsake the cover they really should have today paying level premiums for cover in the future.
or:
The reality is most live well beyond their 60's and may not be able to afford cover when they are more at risk and still need insurance.
Not having crystal balls, Advisors should at least be educating clients and giving them the information to help them make an informed balanced decision for themselves.
The sad thing is most clients have never even heard of level premiums let alone been given balanced advice or the choice.
On 6 September 2010 at 4:32 pm Keith Walter said:
Well said Mark.
It is all very well coming from a purely theoretical stand-point that Celia, Chris Loussion and Graeme Lindsay (the last two of whom I have a great deal of respect for)have but it isn't always just about the numbers produced by theory.
While I personally take account of discounted cash flows, it is important to remember that the thoery is only going to be as good as the practice. Will the client actually use the difference in premium to reduce debt? How long does the client need some cover for? etc.
I admit that I only talked to clients about converting some of their cover (never all) when we were faced with increases in YRT premiums as a result of the changes to tax for life companies. This changed the calculations significantly and meant that there was real advantage to many of my clients to change a partion of ther cover over. I suspect that were Chris to redo his calculations taking this into account as well as realisitc rfeturns he would see a significant "shrinkage" fro the 19 years.
All-in-all, it's very easy to take a few cases and generalise from there. I, for one, investigated each case on its own merits and advised accordingly. I would like to think (maybe somewaht idealistically) that others would have done the same.
On 7 September 2010 at 11:49 am Mike King said:
I read this thread with much interest, as I have facilitated the switch of many clients to Level 80 for part or all of their life cover in recent years (even before the tax changes were proposed, let alone implemented). I agree that the time-value of money concept is an important factor for consideration, but what the critics seem to have ignored is the time-value of the level premium AFTER the annual premium for the YRT contract has superceded the level premium annual cost.
Assuming a policy extends to age 80 (without prior claim), and also assuming that the YRT contract is also retained to age 80, then the maths is indisputable.
A recent example - a 45 y/o female, class 1 non-smoker, $445,000 level cover:
The To Age 80 accrued premium on a YRT contract (with ING) amounts over 35 years, to $234,000 (projected, not guaranteed), while the same on an L80 basis, accrues to $47,900. The "lost opportunity cost" at 3% real rate of return shows that it takes this deal 14 years to come out "even", but over the full 35 years, the return to the insured, in savings between the premiums at 3% RRR amounts to in excess of $35,000.
More importantly, though, the accrued cost of the L80 at $47,915. This amount under the YRT plan would be expended after Year 20, or at age 65. What's more the YRT premium would at that point be $5,988 as opposed to the L80 premium of $1,369 p.a. I suspect the policy would be cancelled at this stage (if not before) due to unsustainability of the on-going cost, regardless of whether cover is still needed.
Even the Level 65 option comes out well ahead on pure cost, if someone believes they will not require cover after that age. The difference in total premiums is $20,500 ($23,604 L65 compared to $44,190 YRT) and the repayment term is 11 years. The accrued savings over time (again at 3% RRR) means the level premium payer is $18,996 better off with the guaranteed level premium.
Given these facts, I will continue to recommend that clients consider the level premium options.
On 7 September 2010 at 2:45 pm ron said:
Well done Cecilia, Graeme and Chris.
One thing I have never figured out is why To Age 80 is a good fit for any customers' needs. Who needs full life cover past retirement age when the kids have gone and the house is freehold? And is it really fair to enter a 30 or 40 year term contract without expecting to get anything back at the end?
And the tax excuse is another great one. So far no company have increased their YRT rates by more than 7.5%, which is a lot less than the 250% increase it would take to convert to L80.
What this discussion really illustrates is the conflict between advice and commission. Some - certainly not all - advisers find new ways to justify their L80 churn (and their new car); this all comes at the expense of the end customer. The financial incentives need to be removed throughout the industry because there will always be some that spoil it for the rest that actually consider the customers' needs.
On 7 September 2010 at 4:26 pm Johnny Adviser said:
Um, Ron, there are reasons aplenty for having LC after 65. The desire to leave a substantial legacy to either family or to a charity, the fact alot 65ers in the future will still have debt, many if not most will still be working.
Many commenters have referred to L80/L65 type products place for at least portion of client's cover, in the same way you may recommend several interest rate fixed periods to go with some variable, and I agree entirely, as that is legitimate and sound advice where appropriate.
This isn't a one size fits all business, and that goes for YRT zealotry as much as Level.
On 8 September 2010 at 8:10 am ron said:
Legacy to a family or charity? So we aren't really talking about risk protection any more, we are talking about a windfall... something akin to a lottery!
Is it reasonable to expect someone to make the decision of how much money to leave family/charities at age 30 or 40? How would you even know how much family you will have past age 65, or even what charities still exist?
Rather than buying L80 for legacy purposes, you'd be better off putting away the monthly premium into a bank account each month and earning interest. Or, if you like the more risky alternatives, perhaps investing it all in Lotto - the expected return of that is actually higher than buying L80.
Celicia's main point is that there is far too much L80 in the market due to poor advice. I totally agree and the real reason for this is the commission rates on L80 are too generous.
On 8 September 2010 at 1:46 pm Johnny Adviser said:
You missed my point Ron; I said there are many reasons to still need/want life cover after 65, not that this cover has to be level.
On 8 September 2010 at 2:57 pm Mike King said:
Ron
You assert that there is "far too much L80 in the market due to poor advice", but this sounds distinctly like no more than your opinion. It may be so, but who's to say, really?
Commission on L80 is entirely irrelevant, and ignores two facts:
a) the rate is the SAME, only the quantum higher due to the higher initial premium;
b) a broker focussed only on income is far better off on YRT indexed to inflation.
The problem for the latter of these is that the policy is likely to fall over when the premium is unsustainable, and will require a lot of reselling to maintain each & every year as the premium rises towards the point where no matter what the broker can say to justify the harsh reality of the skyrocketing costs, the business will be lost. Too bad, all round.
On 8 September 2010 at 9:19 pm ron said:
Wasn't the whole point of the article to point out that shifting to level has not been in the best interests of clients? i.e. too much L80 in the market due to poor advice?
And commission is completely relevant. There is no way that total commission on YRT is more than L80 on any reasonable assumptions (including discounting). If commission was equivalent for YRT and L80 in dollar terms (not the same commission rate) then would we have seen so much shifting to L80? I highly doubt it!
Advisers focussed on $$ and not on the needs of a customer have just as much to answer for as the industry allowing the financial incentives to continue all these years.
On 8 September 2010 at 10:05 pm Pragmatic said:
Lest we forget that in 30 years or so 80 will be the new 65. People are living longer and getting into debt later in life.
Level term has its place, perhaps not for all cover but certainly for the longer term debt a client may have. Good on Keith for writing that you "investigate each case on its own merits and advise accordingly".
Is that not what being an adviser is all about?
If all problems could be solved the same way we may as well give up our day jobs and send clients to the internet to get their own cover!
I took out LT80 at 25 years of age and with time value of money calculated it broke even after 7 years! I now have cheap guaranteed cover I'll keep till 80.... even if I don't need it after 65, I'll leave it as a legacy if I die before 80.
On 9 September 2010 at 12:39 am Denis said:
How on earth can anyone predict how much YRT contracts are going to cost in 30 years' time? What if YRT premiums decrease? So many things are much cheaper now than they used to be.
Is it really wise to lock in a set level of cover and premium over the long term, based on assumptions that will probably be quaintly out of date before long?
My wife has a level term policy set up by her dad in 1971. It will pay out $1,870 on her death. Her dad still pays the premium every year (and jokes about it). This was a very sensible-sounding thing to do back then.
If YRT premiums decrease, these 2010 level term clients will want to convert back into lovely old YRT. They'll have to set up a new YRT policy. And we all know who will be there to help them.
Ah, but what if YRT premiums increase to unaffordable levels? In that case, the simple option to reduce the cover is there.
I'm sorry to be an old cynic but I'm afraid parts of the industry pounced on this opportunity to make even more money off existing customers. It's easier than finding new ones.
Sensible-sounding justifications were given and Advisers were not about to look a gift-horse in the mouth - particularly if the insurer was right behind them with the promotional stuff.
If the long-term mathematical arguments were as fundamentally sound as some here are making out, then why are only hearing about this now?
On 9 September 2010 at 3:28 pm simon beaton said:
Some fascinating arguments here. In my experience few older people choose to cancel their cover because they want to, usually it’s because it becomes too expensive. As for ‘why does one need life cover past 65’? Sorry but does financial risks suddenly stop then? Statistically when I die, I will be about 78, it will involve a terminal illness and some considerable cost to my estate, and I for one would appreciate if some of those costs were covered, otherwise it will come out of my wife’s retirement savings as she will statistically outlive me. If I make a real meal of dying, it could leave her significantly worse off.
I did like Denis’s comment about YRT getting cheaper. I suppose increasing longevity will influence premiums but unless they find some way of outsourcing death to China for example, I don’t think costs will come down that rapidly.
On 9 September 2010 at 3:49 pm Chris Louisson - RMS said:
I found Simon Beaton's personal attacks on Graeme, Celia and myself mildly offensive and unnecessary. Our combined comments were well reasoned and entirely legitimate. Its a weak mind that retaliates to reasoned debate with insults! On 9 September 2010 at 3:58 pm Denis said:
Simon, while outsourcing death itself to China might not be on the cards, a life insurer could come from there. More competition from overseas insurers might also result in cheaper premiums. On 9 September 2010 at 4:09 pm Simon Beaton said:
Sorry Chris, yes your comments were well reasoned and I do apologise to all three of you if offence was taken, which with hindsight is probably the case. On 9 September 2010 at 4:12 pm ray jones said:
I'll try again as my first reply obviously was too hard nosed.
It just goes to show what a diverse group of beings we all are, but as we only represent our clients, shouldn't we just lay it out for them and let them decide?
This discussion is also not about commission, if it were, we would all just sell larger policies. This is about being able to see the bigger picture, it is about being able to paint that picture to the client, to arouse enough interest to look further.......just as it is our job to show them the benefits of trauma, health and income protection.
This future cost of money scenario is also sorely misrepresented, yes in an ideal world where everything fitted together like a jigsaw, you may have a point, but in reality there is just too much going on to seriously give this any credence. Future interest rates, current interest rates, future income, future financial position, future health status....all of these just cannot be bedded down with any certainty, especially our health (which is why we do what we do?). Somethings have to be decided on right here and now, and it some cases it just makes perfect sense to have level to 80.
One last piece.......who wouldn't sell level premium health assurance if any company was brave enough to price one for the market!
IMO, I would prefer level premium options for all risk covers.
On 9 September 2010 at 4:17 pm Confused said:
A thought
For those even selling L80 to cover funeral and final estate costs assuming a potential need for these funds up to age 80. Lets say a 40 year old requiring $50,000 in todays dollars. Assuming a 3% inflation rate does that mean you are recommending $163,000 L80 to ensure the client has enough funds to meet that required outcome in their 79th year (being the latest point at which this requirement may need to be met)? If so are you then not overinsuring the client for their requirements up until that 79th year.
Hmmmm
On 9 September 2010 at 4:36 pm ray jones said:
confused......fear not, sovereign offer an indexed level premium to age 80, suggest you look at this one for that particular scenario. On 9 September 2010 at 4:48 pm Chris Louisson - RMS said:
Cost of money is not being misrepresented at all, particularly where the debate is about cost or cheaper cover over the long haul, and that’s exactly where it all began and what it’s about. Or is it that suddenly, due to the announcement of a tax change, 1000s upon 1000s of kiwi men and women’s needs changed such that they now all need cover well in to their 70s and 80s whereas previous, they did not? On 9 September 2010 at 5:15 pm ray jones said:
Sincerely Chris, with all due respect unless you are incorporating their costs with respect to all their other insurances with their own nuances, then yes, it is being misrepresented, unless of course you only sell life assurance.
Level premium has been offered and sold by this particular broker for years, and my clients are so far ahead of the ball it's not funny. And if by chance they still want the cover in their old age, I will be able to look them in the eye and smile and say "remember when I told you this maybe more expensive now but you may thank me later......"
Foresight is sometimes very hard to grasp and can admittedly be costly, but hindsight without due consideration can be downright expensive.
On 9 September 2010 at 8:38 pm Mike Shaw said:
If you wish to consider another perspective on the debate, take a look at www.isi.org.nz and select “STATISTICS”.
Term annual premiums written for quarter ending 30/6/10 was $58.879m. The weighted average premiums for the previous four quarters = $47.440m. Therefore it would be fair to assume advisers wrote 24% more term business for the 30/6/10 quarter than over the previous four quarters. I am sure a much increased production % to cheer up the life companies.
Something to further cheer up the life companies is the lapses, surrenders and cancellations $22.417m for June 10 quarter, only 4.5% up on the weighted average for the previous four quarters. Maybe celebrations should be held off until we see the 30/9/10 figures, there may be a timing issue when lapses, surrenders and cancellations are reported in the statistics.
$11.440m of additional annual premium over the June 2010 quarter. At a conservative 125% commission rate = $14.3m commission, more than 1 or 2 Signature Class Camry’s.
On 10 September 2010 at 3:12 pm Andrew Logan said:
The opening paragraph sets the context of this article... that there appeared to be a fundamental shift in product recommendations leading up to the tax reform. It wasn’t an attack on a single product type, but the context in which the product is advised. Cecilia is correctly highlighting concerns with a “blanket” approach to client needs as a reaction to a single environmental factor. YRT and Level Term are just tools. They can be used singularly or as a combined solution to solve individual client needs. Comparing them in isolation is like saying “a hammer is better than a chisel”.
I wholeheartedly agree with Chris and Graeme, there are a multitude of factors to consider in each instance and only the adviser, with a full understanding of the client’s situation will know what’s best. I have run countless scenarios on YRT vs Level, utilising discounted cash flows, time value coefficients, opportunity cost and Monte Carlo simulation on a range of investment options and asset allocations. Did I find a solution that fits everyone? Of course not.
On 14 September 2010 at 11:50 am Keith Walter said:
So the debate still goes on.......
Here are a couple of points that might be worth thinking on.
1. Using discounted cash flows etc does have a place - but then it's really only as good as the underlying assumptions the adviser makes about net earning rates and inflation. All examples I have seen rely on fixed rates for these and we all know that these things never stay fixed so the resulting calculations are never going to be right - just a best guess. And you will probably get as many variations to these as there are advisers using this method. (What would be the result if you "assumed" that the rates of inflation and earnings were the same? Think about that for a while when you try to work out a realistic, long-term, "safe" assumption for the rates.
2. Long ago in my distant past working for an insurance company, I was required to calculate the premiums for term insurance level through to age 65 for sale by one of the banks. When the product was launched I promptly bought one covering both myself and my wife. Cover is $150,000 and the monthly premiums are $65.20. Boy, at 62 do you think I am happy that I did? Sure am. Ask people my age what they think of still being able to afford the cover they need rather than having to have the level of cover they can afford!
On 14 September 2010 at 5:50 pm Wayne said:
I read these posts with some interest. It must be close to a record for goodreturns.
Discounted cashflows do have their place and are important in comparing the premium types. However, they are only one side of the ledger. We need to look at the insurance benefits versus the likely customer needs - otherwise they'll end up paying for cover they don't need. Once you have gone past that "cross-over point" on your level premium, you feel obliged to continue paying for cover because it's a good deal, not because you need it... it's a bit like continuing to be married to someone you don't like just because it's convenient.
In the old days, life assurance policies - like your Whole of Life's and Endowments - used to be part risk, part savings. So it was sensible to keep some cover past retirement as you had a substantial fund that would pay out on cancellation/maturity/death.
Nowadays, term life is what is sold to leave money to the family, but if you survive past the term of the contract, you end up leaving them nothing. Take Keith's 2nd point - if he lives past 65, he would have paid $65.20 each month for years and will leave the family nothing. Imagine what that money would have accumulated to in a savings policy by now.
On 15 September 2010 at 10:40 pm ray jones said:
Wayne, all advisers would love their clients to never die or to never get sick, but unfortunately this isn't the case. To look at what Keith could have built up in a savings account, following his 65th birthday is silly to say the least.
The crux of the case is that he can still afford his cover at age 62! If the Bank he worked for had worked out a rate for level premiums to 80 or even 100, then he would be even better off by now, because from his clear sense of mind, he will certainly be living well past the age of 65 :-)
I will state it again that in a lot of situations, level to "whatever", is a very good concept, one which i wish would be used across the board with all risk covers.
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