It’s no secret that cost-of-living pressures have increased significantly recently. It seems as if prices have gone up for everything from groceries to petrol to power bills. Add in increased mortgage costs, and wage growth below the rate of inflation, and it’s no surprise that many Australians are carefully re-examining the family balance sheet in the hope of finding savings.
At the same time, insurance premiums have been climbing.
Factors such as increased claim expenses, poor fixed interest returns and shrinking new business pools have led to increased cost requirements in turn leading to higher premiums.
For your clients feeling the economic pinch, insurance premiums can be a tempting cost to cut.
That’s why it’s important you have an honest conversation about the value of risk management and offer some ways to reduce their premiums if needed.
Less conversation around price, more about value
As investor and philanthropist Warren Buffett says, “Price is what you pay; value is what you get.” To highlight the value of having insurance cover to a client, it can be useful to extend the conversation beyond insurance. This helps a client consider their situation more broadly.
For example, there are many valid alternatives to buying insurance cover to manage risk. A person could ‘self-insure’ by regularly depositing funds into an emergency account or selling off some assets if required.
Ideally, over time, a client’s capacity to self-insure would increase due to decreased liabilities as they pay down debt, increased income, and improved cash buffers.
As an adviser, you can start the conversation by exploring the cost and convenience of these alternative options.
You should clearly outline the consequences of an event occurring – perhaps your client being injured and unable to work for six months. You then look at how they could support themselves in that time using their current assets or a new strategy. Finally, you determine how comfortable your client is with that scenario.
You may find that while your client could theoretically sell assets (shares, property, etc.) to fund themselves, they may not like the prospect of losing those things. Instead, managing risk by paying an insurance premium each year could appear the better option.
Ways to help manage insurance premium costs- Income Protection
Many of your clients may agree about the value of keeping their insurance cover but are struggling to pay the premiums. In that situation, you could suggest an alteration to their policy to assist them with costs.
1. Moving Income Protection from agreed value to indemnity:
According to the Australian Bureau of Statistics (ABS), 13.8% of Australia’s working population is self-employed.1 However, when looking at in-force policies, about 70% 2 are on an agreed value basis. Changing an Income Protection policy from agreed value to indemnity could save up to 20% on premiums. If a client’s income is, in fact, not largely variable, they may be paying more for a risk mitigation tool they can already handle themselves.
For grandfathered Income Protection products (pre-October 2021), advisers should keep in mind the client would still get access to an expanded indemnity, usually assessed on the best 12 months of income in the past 24-36 months, to deal with some degree of variability.
2. Changing the benefit period from age 65 to five years:
The common approach to manage income protection cost is to extend the waiting period on a policy. But changing the benefit period maybe another viable option.
MLC Life Insurance data3 indicates that 89% of claims are resolved within two years, however 82% of clients hold a benefit period of age 65+. Reducing that benefit period from age 65 to 5 years could mean a premium saving of up to 40%.
Statistically, your client is more likely to access a claim on a short-term basis. That means they’re more likely to benefit from retaining early access and less likely to face the situation where their benefit period runs out.
Of course, the long-term risk does not disappear, and you need to discuss with your client how they could deal with this (TPD, self-insurance, etc).
3. Remove the accident option:
Accident options have become significantly more expensive, due to the number of claims. Removing this option from a policy could cut 25% of the premium cost. You should speak with your client about what the accident benefit covers (for example, payments during the waiting period) and if they have the capacity to fund this gap from a cash buffer or employee entitlements.
Ways to help manage insurance premium costs- Lump Sum
In the context of lump sum cover there are a few key areas you can search for when considering affordability. It starts with ensuring the sum insured can still be broken down to specific quantifiable needs that are able to be communicated to your client. If not, its clear the link of value and need is not there and your client may consider it appropriate to reduce cover.
When considering tying sum insured to need, it may be appropriate to consider if stand-alone benefits are still the most appropriate option for that particular client. It may be that a TPD/Trauma benefit being paid would cover off some life insurance needs and that linking the benefits would be an appropriate way forward. It’s also worth noting that some products in the market will have the “Life Cover Buy-Back” as a built in feature to TPD/Trauma, giving the chance to repurchase this cover 12 months post-claim if you do go down the path of linkage with view to saving 20-30% of premium.
Trauma insurance in particular can often become much more expensive as clients age. An option to save cost in this scenario would be to look at the trade-off of the ‘standard’ Trauma product rather than the ‘plus’ contract that includes partial benefits with most insurers. The loss of these features must be clearly articulated, but the core benefits such as coverage for Heart Attack and Cancer will still be covered, which accounted for 84% of MLC Life Insurance Trauma claims in 2021.
Superannuation and indexation
Paying for life insurance out of a superannuation account has often been used to manage affordability issues, but this strategy should be approached with care. Although it saves money today, it can significantly affect a client’s super balance in the future.
For a 40-year-old earning $100,000 per annum, funding $3,000 of insurance premiums via superannuation can mean having about $140,000 less in super when they retire.4
You should make sure your client is fully aware of those outcomes.
In-built indexation is another consideration with insurance policies. The sums insured on policies are increasing at a compounded rate, in line with the consumer price index (CPI), despite a person’s insurance needs (ideally) reducing over time. In addition, wage growth may not be keeping up with the new sum insured.
A client may be shocked at their premium but not consider if the sum insured is now more than they need. Taking a pro-active approach to managing indexation and educating clients about this can help significantly with client retention. In short, act before the horse has bolted.
Drive better retention outcomes
Reframing the insurance conversation away from just the cost of premiums to look more broadly at risk management can help clients better understand their position. It can also drive better retention outcomes.
Your goal as an adviser is to deliver a protection plan that has the right mix of insurance and cost for each client. Having an honest conversation makes that easier.
Tell us about your biggest challenge with risk advice, contact Marshall via LinkedIn. Marshall will address the top 2 most common challenges in the June LinkedIn Live Q&A.
Also don’t miss out registering for the MLC Life Insurance upcoming webinar in June – Register for “Building a Modern Insurance Philosophy”.
1. ABS, Employment in the 2021 Census, 30 November 2022.
2. MLC Life Insurance in-force policies, April 2023.
3. Claims & In Force Statistics: MLC Life Insurance 2022.
4. Moneysmart.gov.au, Superannuation calculator.
