Reconciling wants to needs

The three most common goals clients have for their potential life insurance package and your role in helping them reconcile their wants from needs.

Tuesday, May 12th 2020, 8:00AM

by Russell Hutchinson

Russell Hutchinson

What’s ideal?

In recent discussions with advisers and technology people I have seen several different approaches to establishing the ideal insurance package.

Working through the different approaches there are some important underlying concepts.

The first, which they all share, is the concept of indemnity. Having said that, financial underwriting limits apply for good reasons.

Most systems of needs analysis are therefore trying to establish the level of cover that would constitute full indemnity for the client, but no more.

This is what the client would ideally buy to obtain maximum financial protection, before considering the cost.

There are two main methods of calculation employed: capital needs analysis and consumption-based measures.

Capital needs analysis builds up from tackling a series of goals such as: repaying debt, meeting final expenses, replacing income and leaving a legacy.

It also nicely helps the client to maintain engagement and emotional commitment. By thinking through how much is required, they imagine what life would be like without that financial help.

Consumption-based measures focus on preserving the ability to consume – usually by looking at the income a household has, deducting savings, and seeking to provide enough financial protection to preserve consumption after an insurable event.

Often these seek to engage the client by showing them how income – and therefore consumption – would be affected in each of these events.

There are better and worse versions of these approaches. Left alone, the client often makes poor choices, going heavy on large lumps of cover for scary-but-rare things and too light on replacing income.

However this is done, though, they are far from the end of the road. Because life is rarely ideal. Which brings us to the methods of calculating cover required for different goals.

The three most common forms of goals – however the client might describe them – are essentially a) just enough cover to get by and keep the house b) the best cover I can buy for $x budget and c) just funeral expenses.

This is a kind of modified ideal. The best under the circumstances. After all, only insurance actually in-force can ever be of any help.

The trade-offs required between different types of cover can be left to the client to resolve or tackled directly in the needs analysis.

Because clients aren’t professional advisers, I don’t think they should be doing it. They easily fall into the trap of meeting uninformed wants, rather than identified needs.

Effective presentation tools show the client what would be available under each contingency and what they would achieve.

When the client starts leaning into the process – seeing that by allocating more budget to trauma and IP changes how much they will have to spend in the event of the claim, then the battle is largely won.

Reconciling "wants" to "needs" is where advice is really given.

Tags: insurance Opinion Russell Hutchinson