Slow to adapt and fixed in our ways - the problems with life cover

I think there's an awful lot of "we do it this way because we have always done it this way" going on in the life insurance industry right now.

Monday, May 17th 2021, 9:11AM

by Jon-Paul Hale

Please hear me out - this ties in with my last article and highlights why we're not thinking about this stuff the way we probably should.

For the younger ones, a history lesson.

In the good old days of the rate book and single page application forms, we had Whole of Life (WOL) cover. Yes, that was it, one product to fit every situation - and it was the only solution.

WOL cover was a good insurance contract but not so great as an investment vehicle - yes, it was used for that too until endowment policies appeared - but pretty good when it came to life insurance advice.

The key was to buy it young and for a high enough value that it was useful with the expectation that your income in the future would increase so the features of the product could be better utilised.

Get sick and can't work? Borrow from your WOL policy. Suffer a trauma event, borrow from your WOL policy. Want to buy a business? Borrow from your WOL policy.

Die? Yeah, that's pretty final, but the insurance benefit with the remaining bonuses got paid and cleaned up the mess.

Simple, right?

Not so much, as the understanding and use of WOL in these situations wasn't as good as we would have liked. It took me four to five years in the industry before I got a handle on how the damn things worked, fortunately, I wasn't advising on them - that would have been dangerous.

With inflation through the '80s and '90s, WOL didn't do so well.

With the sums assured of the existing covers being devalued, bonuses underperforming against funds' markets, and the cost of holding ever greater value WOL policies became really expensive.

So, term insurance was born, and as Simon Prentice put it to me one day, "WOL is like buying a house, you own it, and you can do what you like with it. Term insurance is like renting a house, while you pay for it, you get to use it, stop paying for it, you're out on the street."

And this is the first difference we haven't adapted to as well as we probably could have. Term insurance came with a lot of other benefits to fill the place of lost WOL features.

The second part of this is medical technology. Through the '80s and '90s, we saw a massive improvement in health outcomes and life expectancy across the board.

In the '00s, we were able to review adviser-client bases on product distribution, this was a new thing, and it highlighted that certain products were undersold/advised in client bases. They were typically favouring life and trauma sales on the most part.

Yes, things have moved more into the disability and medical space, but the reflection on what we did in the past is what we do - because we always have.

In the same vein that you can't have Covid if you don't test for it, the same can be applied to our advice. Yes, we all have biases towards providers and products despite the research as much as we advise clients. I'll park that for another day.

My point is that with the long-established habits of WOL sales and the approach to highly analytical cover justification, combined with medical technology and the change in product makeup, we haven't adapted our focus as well as we could.

I'm sure that will ruffle a few feathers, I hear you, I'm not saying we shouldn't provide life cover as a solution, it is still very much a valued product.

However, here's a few things that may temper that.

- Based on the data from QPR, the average person is likely to reach retirement and not claim on their life cover about 95% of the time.
- The average life expectancy for a newborn is climbing at roughly one year per year. This is tempered by the obesity epidemic, and pandemics don't help. However, life expectancy is still significantly higher than retirement age.
- Life insurers want you to be selling life cover. It is the one product with a significant margin that helps their profits.
- Up to 40%, when the likes of trauma are around 5-15%, and disability and medical insurance are under 5%.
- We still don't have enough discrete TPD sold to be effective although the bundling in trauma cover has evolved in the last 10 years or has lifted the inclusion of this policy in the community.

And that's part of my point. The vast majority of people will make it to retirement, they may be broken but still very much alive, and life cover doesn't help them.

They get to retirement and cancel it, it's too expensive, and they never saw the need for it to be level when younger, or they didn't have the budget at the time.

With a 5% chance of claiming life cover and around 30-35% chance of claiming disability and trauma covers, the focus needs to be further down the spectrum at the coal face for the client. Medical insurance, too, as our public system is a shocker!

I have a colleague outside the industry in their late 60s that doesn't have insurance and they are facing a double knee replacement after having a hip replaced a few years ago. The wait for those knees has been 12 months, with another eight months ahead of them. Yes, nearly two years.

And this is the point; insurance is about helping people in need when they are in need, not when they die. The loss of ability to borrow from your WOL policy was supposed to be replaced with the use of disability and trauma covers. Medical too.

The critical thing is that if people have financial support, they can afford to wait for the public system.

If they have medical cover and no disability cover, they can't afford treatment if they can't cover the loss of income.

I have a ratio of about 20 to 1 on the disability to trauma claims experience with my clients. Trauma doesn't work nearly as well as we expected it to, leaving clients with gaps.

This is where we need to be a little more circumspect on the life cover numbers favouring disability and other covers. We need to help clients focus on the more likely but less catastrophic benefits as they are the ones they need, at the expense of the lotto ticket win if they died.

Sufficient life coverage is needed if they do die; simultaneously, we're overcooking it in many situations. And clients know this. Also, lotto winners have a poorer life experience than if they didn't win, so it's not a sound sales pitch either.

Presently 20% of people have disability coverage, and about 25% of people have medical coverage. It's far too low for our communities, and it's far too low for the insurers to be able to price it effectively.

This is the rub; if we had a higher level of medical and disability coverage in the community, we would have cheaper premiums for everyone. We would also have better health outcomes from the public system with less pressure on those who don't or can't access insurance benefits.

We know the private medical industry and ACC, in their individual spaces, already do more "elective" surgery than the public health system; this is the direction we need to continue with as the government isn't going to solve the financial issues for people in our lifetimes, if ever!

And I also get the issues of a two-tier health system; we see it in America. The reality is that we, as individual advisers, can't change the system; simultaneously, we can help our clients incredibly well in their time of need, when we get it right.

Tags: health insurance Jon-Paul Hale Life insurance Opinion