Being unrealistic when it comes to insurance premiums

For many clients, life insurances involve a paradox: sometimes the clients who really need the insurance simply cannot afford it. This is sometimes a difficult reality for advisers to need to accept (of course, it is even more difficult for their clients to accept).

At those times, the adviser needs to think laterally: is there some way for the client to obtain some form of insurance that is affordable for them? This might be some limited cover through one or more super funds, for example. Or it might simply be an insurance policy for the maximum amount that the client can afford.

The point is that there is no point in recommending a level of cover, and consequent premium, that the client simply cannot afford. There are several reasons why this is wrong:

  • The client will not (probably cannot) accept the advice;
  • The client will not come to trust you for any advice at all;
  • You will have wasted time preparing an SOA that the client was never going to accept; and
  • Your SOA will not be compliant.

Regarding this last point: remember, there is an overarching requirement that all advice to a client be in that client’s best interests. This is stated in s961B of the Corporations Act 2001 (Cth). S 961B(2)(b) includes an obligation on an adviser to ascertain the financial situation of the client as it relates to the advice sought. The client’s ability to afford the premiums is clearly a relevant part of their financial situation.

If you recommend a policy and premium that a client simply cannot afford, and they therefore do not take up the policy, there is a good case to be made that your advice was not in the client’s best interests. This breaches the Act and renders your advice non-compliant.

So, for clients for whom affordability is an issue, please don’t ignore this fact and simply recommend an unrealistic level of insurance. This adds risk to your own practice because it does nothing to discharge your obligations under the Law. Much better to be upfront with the client about their difficulty in affording insurance and then try to find ways to offer them some protection. Then ensure that your SOA refers to the difficulty with affordability (which demonstrates that you identified the client’s financial situation and provided advice relevant to that situation).

The Dover Group