Needs analysis focus: what data do you need?
Whatever methods you use for modelling for insurance requirements, one important raw material is good data. A lot of attention is paid to the data that must be collected from the client for the needs analysis.
Monday, August 15th 2022, 9:20AM 1 Comment
by Russell Hutchinson
On this side of the needs analysis, we probably collect too much information, and sometimes end up trying to be too specific. But there is another category of information – the assumptions for modelling – which we probably use too little and could be much better tested.
For us the key (non-client) data elements and their associated sources are as follows:
- Taxation brackets – a good tax estimator is needed to work out the impact on claims values to arrive at the in-the-hand levels of cover.
- Social welfare benefit levels – these set a floor at which private cover may not be necessary. Some help is available to even wealthier clients, although it is perfectly reasonable to ignore welfare assistance if your client would prefer to do so.
- Funeral costs – just keeping track of some indicative funeral costs is well worthwhile as a contributor to your overall build-up of the life cover figure.
- Age-adjusted life expectancy – helpful for a good conversation about risk, and vital when you wish to discuss drawdown from an invested fund for the life of the survivor, while allowing for consuming some capital.
- Appropriate discount rates – this has been tricky in the current environment, but will get easier as interest rates return to moving between historical norms. Selection of discount rate is central to working out the capital required in several situations. Longer-run averages or forecast averages are probably wise right now.
- Income inflation – how fast will incomes rise? Not fast enough for most people! But alongside inflation you may want to consider how the income from your insurance package may fare in a higher inflation world.
- Cost price inflation, both current and expected – necessary for the reasons above.
- Expected return on investment – vital for the estimates of lump sums required to fund an income. Once again, a longer-run or forecast return is probably required right now.
- Age of independence, retirement, and of loss of independence – will your kids be independent at 18? 21? 25? That age sets a time horizon to plan for claim proceeds to last. In modelling a claim scenario will your survivor retire at 60? 65? Or 70? Even 75 is possible. With more people working in some capacity past age 65 and generally longer lives, it is worth considering age 70 as standard for most class one and two occupations.
- Childcare costs – if a surviving partner in a household with kids wants to continue working, then allowance must be made for childcare costs.
These are for the most part readily available on a quarterly basis and at the least annually. But they have to be found and used appropriately. I wouldn’t bother with sharing all the details with any but the most analytical clients, but I wouldn’t want to be without them just in case.
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Largely yes, all of these points need understanding for advice.
However, with 1. Income cover we’re naturally limited with replacement ratios and maximums of coverage in terms of the claim outcome.
More appropriate here is the differentiation of taxable vs non-taxable benefit outcomes as various tax bands have different in the hand outcomes.
Passive and unearned incomes need consideration where indemnity style cover off sets this at claim as part of total earnings but agreed doesn't. But passive incomes at underwriting may result in no agreed value non-taxable coverage able to be placed.
And limits on maximum cover. I have a client that was insured for 37% of gross income as the maximum available, with further growth in income it's now at 22% and I can't add to this. Sometimes this can't be fixed.
6. While we can get into projections on this, and significantly overcook the advice, at the product advice level the inflation and fixed minimum CPI increase options will track with the reality. And it often outstrips the clients increase in underlying incomes too.
On lump sum products using special event options and forward underwriting options of future instability provide for increases without medical disclosure as required. The inflation number projection in practical terms is less important than the ability to adjust the cover over time. (as we’re supposed to be servicing this, it's not set and forget)
8. Understanding life income covers is a key mitigate to this issue, one that isn't used nearly enough. Part of the problem with lump sums is you're expecting the survivor who often isn't the one managing the money to a; do the right thing and give the money to an adviser to manage it, & b; that the money will be invested to produce the desired return.
Too many options for this to fall out and not work, and often doesn't work. Where the life income product provides far more certainty. And it's both guaranteed and inflation adjusted income.
For trauma and TPD, sure there's a need to scope this over and above IP cover responses.
9. An extremely valid point and one where I suspect the majority of advisers are still using to age 65 even though the age 70 option has been available for the better part of 20 years with some providers!
10. Somewhat mitigated with the life income cover discussion, mortgage paid off and lost an income, the life income benefit at that level largely mitigates this (being that those with young kids typically have a mortgage, and those without the mortgage don't have young kids anymore. Yes, renting situations have a specific housing need as well)
There's always depth and nuance to every situation, but we also get too tied up with over complicating the process too.