[Opinion] More on a FSCL decision – issues for advisers to consider

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Steve Wright asks questions about a recent FSCL decision on funeral insurance and what it means for insurance advisers.

Thursday, December 12th 2024, 12:56PM 2 Comments

by Steve Wright

In a reported complaint to her insurer and FSCL, a person apparently paid premiums totalling $37,000 over 17 years, for a funeral benefit of $10,000.  Although the complainant was paid compensation by the insurer (the basis for such compensation and its value is unknown to me) the client also made a complaint to FSCL against their adviser, who ‘sold’ them the policy in 2007!  The adviser agreed to pay $500.  

JP Hale has recently written a piece on some aspects of this issue. I want to explore the possible practical implications for advisers and FAPs, of FSCLs reported “Insights for advisers” in the case study (read it on their FSCL’s website, it’s under life insurance, not funeral insurance).

According to FSCL:

• “Advisers must ensure insurance policies continue to meet the needs of each client, each time it is renewed”; and
• “The adviser should have turned their mind to the fact that (the client) had paid triple the amount of cover in premiums at the time of renewal.”

What are advisers to take from these insights? 

For starters, I don’t believe advisers can “ensure” anything.  All advisers can do is give clients suitable advice.  What the client decides to do with that advice is their prerogative. 

Secondly, considering most life and health policies renew each year, does FSCL expect that:

• Advisers must insist clients allow them to perform some sort of mini needs analysis each year (good luck with that)? and
• Where clients have more than one policy, each with different renewal dates, such clients should be reviewed more than once annually?

The reality is that with life insurance, unlike fire and general insurance, renewal is automatic and generally requires no action from policyholders.  Policyholders, the vast majority of whom pay premiums monthly or fortnightly, can also stop paying premiums any time they like.  

I suggest that, as life insurance needs are usually long term and often don’t change from renewal to renewal, annual reviews should suffice (if you can get clients to do that regularly).  Whether some additional needs analysis is required depends on what relevant client circumstances have changed since the last review.

As far as ‘turning their minds’ to the fact premiums might likely to exceed cover, what are life advisers expected to do?

Is it FSCL’s expectation that advisers are required to keep track of (or obtain) details of total premiums paid (does that include policy fees and GST where applicable?) and report on these as a proportion of potential claims benefits, for every product and optional benefit held by every person insured, at each renewal (review)?  I’d suggest this would be an unnecessary and onerous task for advisers, of dubious value to anyone.

If clients have paid more in premiums than they could receive at claim, what recommendations regarding that policy are appropriate?  The options appear to be: keep it; change it (for example lower the sum insured); or cancel it.

Shouldn’t any recommendations be determined by continued need, not premiums paid to date?  Who would believe a recommendation to cancel a policy simply because of the sum of premiums paid, where there was still a need, would suitable, or prudent, or diligent or in the client’s best interests?

It’s important to recognise that insurance premiums paid can often exceed claims benefits received.

This is the nature of insurance: some must pay more and claim less or even nothing at all, so that others, who may have paid very little or nothing yet, can receive much more.  Of course, it seems sensible to ensure this is made clear to clients – life insurance is not a savings plan.  If it was, claim proceeds would be limited to premiums paid (perhaps with modest interest) only.

Perhaps FSCL is intending that their adviser insights in this case should be limited to funeral insurance?

Perhaps funeral insurance is different, after all, everyone dies, and funeral insurance is designed to pay funeral expenses!  But here’s the point, while it’s true that death is certain, it’s timing is not.

This is why it’s prudent to take life insurance when the need arises, even if at a young age. Insurance is about providing money that you don’t have when you need it, be that for paying the mortgage or paying for a funeral.

To my mind, even with funeral insurance, it’s still a question of continued need rather than how much has been paid.

Steve Wright has qualifications in economics, law, tax, and financial planning. He has spent the last 20 years in sales, product, and professional development roles with insurers. He is now independent and helping advisers mitigate advice risk through training and advice coaching.

Tags: FSCL Funeral insurance Opinion

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