How to fix the underinsurance problem with your clients?

[ February 06, 2013 ]

There are smart ways for advisers to both address underinsurance with clients and secure their trust and long-term engagement

Risk insurances are an essential part of every financial planner’s skillset – or should be.

But they should only be a part of the skillset, not the whole skillset.

Many older financial planners started off working as risk advisers in the old AMP National Mutual days, and became very skilled at installing income continuance, life and trauma insurance policies with the largest possible sums insured and the largest possible premiums payable. Thankfully we have come a long way since then. There is more to financial planning than just selling risk insurance products.

These days, mitigating risk is less about selling product and more about making informed and sensible recommendations across a range of financial planning products and strategies. The client’s overall strategy is critical: and risk insurances are just a small part of this overall strategy.

Take the idea of encouraging a client’s partner back into the workforce to create a secure second family income, and using the extra cash flow to reduce non-deductible debt as a preferred investment strategy. Both strategies reduce risk, but neither get a mention in the traditionalist risk insurance training school.

I cannot see why they don’t: both ideas are a more effective long-term risk management strategy than forever upping the sums insured and upping the premiums.

The big risk in the risk insurance space is underinsurance. Most clients are underinsured. They know they are. But competing family budgets mean they cannot afford the higher premiums. Advisers slavishly recommend the sum insured figure generated by a computer model without appreciating the real world demands placed on mum and dad’s weekly budget. Mum and dad know they need more insurance. But where will the money come from?

The Dover SOA solution is simple: take the bull by the horns and tell the client they are underinsured. Explain that in a perfect world they would have more cover, but their budget means they cannot afford it. Write something like: “This underinsurance position has been discussed and, in summary, a compromise position has been adopted where you have chosen a reasonable sum insured but not the full amount we originally recommended.”

This simple SOA clause moves the risk of under-insurance from you back to your client.

It’s important to get the tax planning side of things right: life insurance inside a super fund normally makes the most sense and gets your clients the most after tax insurance bang for their after tax premium buck.

Why look only at traditional life office offerings? The cheapest way to get life insurance cover is via industry superannuation funds. It’s remarkably cheap, quick and simple and may be a godsend for a client who cannot otherwise arrange cover.

Why obsess about commissions? Why not rebate most or even all commissions back to your client and charge a simple time based fee instead? Put your clients’ best interests first and get them bigger and cheaper cover.

The clients who know you have reduced their risk exposure through these smart planning strategies, (ie cheap industry fund life insurance, a sensible “compromise” sum insured, tax efficacy and low, or even no, commissions) will also know you put their best interests first.

Your will have a client for 30 years, not just 30 days. Your clients will love it. They will know you are with them, and on their team as their trusted primary adviser – and not just someone selling insurance.

The Dover Group