Be realistic about your client’s ability to pay

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).

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
  • its probable the underwriter will not accept the application
  • its probable that even if the client accepts the advice initially, the policy will lapse soon after.

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 Corporations 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)  and the recommended sums insured are clearly expressed and understood to be compromise amounts.

This makes your advice excellent.

The Dover Group