When to use a Golden Life policy and changes that could be made

Funeral plans are no longer a viable product, mainly because they have been deemed unreasonable contracts. One alternative is a Golden Life policy. Jon-Paul Hale explains.

Thursday, June 27th 2024, 6:00AM

by Jon-Paul Hale

Why are funeral plans unreasonable contracts?

The pricing of these plans is such that, held long enough, the policyholder can pay significantly more than the policy pays a claim.

This is considered low value and unreasonable for consumers.

Why is this?

Because of the nature of the contracts, the pricing is about the risk. The policy has no medical disclosure, and you have a variety of people to cover, including the terminally ill. The pricing needs to reflect this significant risk.

Because of this, it's not unusual to have pricing that is five to10 times the standard premium of an underwritten term life cover.

Yes, in many circumstances, a funeral plan contract is not appropriate for people; at the same time, we have thrown the baby out with the bathwater.

I have several clients that have Golden Life policies, and they are quite appropriate.

Two case studies:

A couple in their mid-40s who could not access traditional term insurance because of existing medical conditions.

For him, he had a bowel rupture and was in the middle of treatment with a stoma; I placed Golden Life cover to provide for the immediate risk they faced as there was no alternative.
For her, she had complex conditions with significant pain management and faced several surgeries.

Since his surgery to reconnect everything and get him back to normal function, I have moved him to traditional life cover as this is now possible. The policy served its purpose for that period of time. The break-even point on this policy was 51 years.

For her, she is still on the Golden Life policy with surgery in the last 12 months, which should allow us to move her to a more traditional policy now that the pain history has been addressed. The break even on this policy is 73 years of cover.

The point is that the insurers at the time wouldn't offer cover, but we didn't have terminal conditions either. The conditions had a treatment pathway, and we needed coverage while that was worked through.

My other couple came to me with medical insurance and no other coverage. I couldn't place any other cover at this time, and we managed their medical coverage through some significant claims.

When they reached the point of retiring and dropped the medical cover due to the expense, they wanted cover for the next stage of life: funeral planning.

At this stage, again, I couldn't place traditional term life cover. BMI was 40+; we had diabetes and cardiac conditions with both of them. The underwriting answer was a decline.

For this couple, Golden Life was an appropriate approach. They couldn't get normal term cover, and they will tick off the no more premiums before age 85 that the cover has baked in.

Will they spend more than the face value of the cover over the term of the contract? Probably. At the same time, this was the disclosed risk they had accepted.

The point here is that the need for the cover is between the commencement date of the cover and the time they could save the value of the contract, the point of life cover. This means it is a reasonable risk-return for what the client needs.

For him, it was a 7.2-year break even, and for her 14 years, he's now past that point, but that was also the risk that was taken.

In terms of their health, it wasn't unreasonable to assume that the contract would pay in the next 10 years, given the policyholders' health. They have both outlived their odds so far.

In these two cases, the now-retired bloke should have saved the money; his wife is still in the value period between premiums paid and money from a claim.

The younger couple doesn't have such an acute challenge with premiums paid, and he has since been moved onto term life cover, with the Golden Life cover having done its job.

Another client who had Golden Life cover passed away a few years ago after holding the cover for four years on a 12-year break-even contract. This cover did its job and the widower was grateful to have the financial support of the policy at the time.

This style of contract is needed in the market, and appropriate controls must surround it.

This style of contract is not a high-volume contract; it is a last resort one.

It is needed where there is a demonstrable need where underwritten coverage is not available.

My suggestion to the providers that have, or could operate in this space is to bring this style of contract back under the following controls:

It has a low commission aspect, enough to make it worthwhile but not so high that it unreasonably impacts premium pricing. A level that reduces the use of this as the first cab for advice.
The application must come with justification that the coverage is the only option for life cover.
Proof of the decline of cover elsewhere within 90 days of the application.
or a level of medical disclosure that determines the term life option is not an option.
Clarity of advice is needed so that the client understands the cost-benefit aspect of the coverage, where they may pay more for the contract than the policy pays.

Maybe even have it only as a fallback where a traditional term application has been declined. However, there is a waste of time and energy aspect to it that none of us want.

Maybe turn that into a short-form medical declaration, where the term life assessment can be done quickly and simply before reverting to the Golden Life approach.

In addition to my above suggestions, the product is only available to "qualified" and accredited advisers, who must obey additional conduct requirements to have access to it.

(Yes, I know we have had issues with advisers using these products where they should not have; this is why they were removed from the market in the first place).

As advisers, we already do a lot of work with a client to get to the point of a decline of cover, and then we come up with nothing when there is still risk to be covered.

An improvement on the Golden Life approach is to allow higher sums assured; the old $50,000 maximum approach is way below the average household's needs, as are the $10,000 funeral plans.

We need to adjust our planning here, where funeral costs can top $40,000 on their own.

To qualify that:

* $14,000 for the funeral
* $1,500 to $2,000 for the after party
* $3,000 to $5,000 for the memorial or headstone to keep them planted.
* $5,000 for managing the estate, $15,000 if they don’t have a will.
* $5-10,000 to get kids home from London because they're broke. Alternatively, they could get family members to the funeral or repatriate the remains.

This is the more vulnerable end of the market, where the need is not being addressed, and there is a significant need for a prudent, well-managed product to be introduced.

Tags: Jon-Paul Hale