6 minute read
INSURANCE
INSURANCE By Steve Wright
KEEPING THE CLIENT SATISFIED
Advice on premium structures – what should you be doing to be compliant, asks Steve Wright.
Premium structures for life,
trauma and disability insurance in New Zealand range from YRT (also known as “rate-for-age” or “stepped”) to “Level Premium” and other options in-between.
Some are guaranteed, meaning they come with a guarantee that the underlying premium rate will not change and others do not, meaning premium rates can be increased.
Understanding the various options and explaining their relevant strengths and weaknesses is essential for providing clients with compliant advice. Remember that the general rule is that you must give the client information that enables them to make an informed decision.
YRT is the purest form of premium in the sense that the client is paying the exact amount required to cover the risk they pose based on their current age. As such it is the cheapest option at application time, which is useful for younger families because they are more likely to be able to afford the sums insured they need.
Client expectations
YRT premiums will go up, though, usually every year as the client ages. These increases can become relatively large at older ages (so careful management of client’s expectations at policy review and a reminder of how valuable their cover is, is recommended!)
“Level” premiums, at the other end of the spectrum, usually “smooth” or average the cost of cover over a “term”, typically five, 10 or 15 years or to age 65 or 80 or even longer, in some cases. This means clients pay more in the early years (and, sometimes, much more) and less in the later years making up the “term”.
Level premiums can often save client’s money over the long term but only if they hang on to their policies long enough. Clients do need to be made aware that if they make a claim, switch providers or change cover types early on in the term they probably will have overpaid significantly.
It is also very important to determine whether the premium rate is guaranteed.
Increased sum insured
A guaranteed rate means the insurance company cannot increase the underlying premium rate it charges that client during the “term” (premiums might still go up due to increases in sum insured from indexing but this is payment for increased sum insured, not an increase in underlying rate).
Many assume level premiums are guaranteed and YRT or stepped are not. The reality is both stepped and level premium structures can be guaranteed or not. If premiums are not guaranteed, the insurance company can increase the underlying rate, thereby increasing the client’s premium. It is really important to understand whether a premium, particularly a level premium,
is guaranteed and make sure the client understands what they have.
A client who has accepted paying higher premiums initially, to pay less later on, will be banging very loudly on your door if they do not have a guaranteed rate and the insurer increases the client’s premium.
What should you be disclosing to the client (in writing preferably so you can prove you did it sometime in the future)?
If you are recommending a YRT premium structure:
➤ You should explain that although the premium is currently the cheapest it will ever be, it will go up with age. ➤ And that at younger ages these increases may be very small but increases will become larger at older ages, larger than current CPI inflation for example. (Clients will logically refer to the CPI inflation rate for comparisons but in reality the inflation rate is different to the additional risk that age poses and so not directly relevant.). ➤ And, finally, that over time, assuming the client continues to need cover long term, does not claim or change cover or providers, a level premium structure may prove cheaper, although the extent of this may be lower if the level premium is not guaranteed and premium rates go up.
➤ You must compare the initial premium with YRT and explain why the level premium is higher. ➤ You should show the client how many years it will take for the level and YRT premiums to reach parity. ➤ Show the client how long it will take before total level premiums paid since inception equals YRT premiums payable (break-even) (and don’t forget to factor in the time value of money). ➤ You must also confirm whether or not premiums are guaranteed. If they are not guaranteed, explain that premium rate increases by the insurer can be passed on to the client and that if this happens the premium parity and total premium “break-even” points will be pushed out to even later ages. ➤ And finally that over time, if the client does not need cover long term, makes a claim or changes cover or providers, a level premium structure may prove more expensive.
So what is the right premium structure for the client? It depends on the client’s needs and circumstances. Several matters should be considered, though: ➤ How long the client is likely to need the cover and how long before the cover expires (income protection, TPD and even some trauma policies expire as soon as age 65 or 70, for example)? ➤ A level premium structure does require a long term commitment to remain on the same policy with one provider. ➤ If the only way a client can afford level term premiums is to accept a lower sum insured then that is very dangerous territory for both the client and the adviser. ➤ If the right level of cover is taken but the premiums are much higher with a level term structure it can look suspiciously like a mechanism simply to increase an adviser’s commission. This, again, is something we would not want, so full disclosure to the client is essential. ➤ On the other hand, YRT premiums can become expensive in old age, which can create affordability problems if the client still needs as much cover at older ages. Fortunately cover requirements usually decrease with age once clients get closer to retirement, pay off their mortgages and the children grow into adults.
Whatever structure you recommend, make sure you explain all the pros and cons and various scenarios to the client. You don’t want to set yourself up so that the client can point an accusing finger at you, so make sure that they understand the consequences of accepting your recommendation and have sufficient information to make a fully informed decision.
Premiums guaranteed
My personal cover is on a guaranteed stepped premium structure, available from some providers with, for example, five or 10-year terms. For me they work well because I feel I get the best of both worlds: the premiums are guaranteed for this term, which I value, and, as the structure is stepped (premiums are not smoothed and although they don’t go up by age, they do go up by a fixed 5% each year), I don’t end up paying more than I need in the early part of the term as the stepping allows initial premiums similar to the YRT equivalent.
While I think advice on premium structures is important, the premium structure can never be more important than the right benefits (necessary sum insured, right benefit mix and most appropriate policy) because at claim time, which is why we have insurance in the first place, the wrong product, provider or level of cover, can never be put right by the premium structure chosen. ✚
