These powerful two words signify the commitment made by two people to each other, “for better, for worse”, “in sickness and in health” and “until death do us part”. Jill and I made these vows to each other over 25 years ago, and then almost prophetically at our wedding reception, my best man gave a wonderful speech titled, “Do you ever know your partner for life?” His message was that marriage is a journey that will go through many ups and downs where you continue to learn new things about each other and how the ritual of daily/regular communication is vital for a marriage to be sustained.
Fast forward 25 years, and the parallels with the contractual commitments between a customer and a life insurance company, especially as it pertains to life protection cover (death, disability, illness and funeral) jump out at you.
So, as the customer’s financial advisor,
“Do you really know your life cover partner for life?”
The reality is that life insurance contracts and protection cover needs require just as much effort to maintain as a marriage; the same regular communication and learning disciplines.
I believe there are four key questions you need to consider, as a financial advisor, to assess the quality of your partnership with a life insurance provider:
- Will my marriage go the distance?
- What could end my marriage?
- Will we support each other financially throughout our marriage?
- What are the perks that come with marriage?
Will my marriage go the distance?
Sadly, referencing SAFacts, approximately one in five marriages end in divorce (a low rate by international standards). Similarly, not all life policies go the distance. A person may appreciate the need and be able to afford life insurance, but situations change and as many as two in five life insurance policies lapse or are cancelled before a benefit is paid.
Why is this important to understand? The reason relates to the price your client pays for this life insurance cover. Your life insurance company knows that not all policies will go the distance, and they allow for this in the premium your client is charged.
If a 30-year-old wants life cover of R5-million they might be charged R800 per month for it. This rate is determined by your life insurance company based on different assumptions about the future experience, based on what has happened in the past, including how many people will lapse their policies early. Knowing that not everyone will keep their policies for life allows your insurance company to charge a lower premium.
The biggest expense on a life policy is a claim; if someone dies, that R5-million claim must be paid. But if, over time, 40% of people don’t claim and still pay premiums for a part of that period, then the average premium for a group of customers may decrease.
If every person who purchased a life insurance policy kept it for life, your life insurance company would probably need to charge your client R1 200 per month, because they will need to pay all those R5-million claims.
But what if behaviours transform and more people decide that they are going to stay married? What if the assumptions that were relevant 15 years ago change? An interesting trend over the last seven years is that customers started to place more value on their life insurance policies, which resulted in more policies going the distance and insurers paying more claims. How many customers and FAs are having conversations about the “guaranteed period” on a life insurance policy?
The advent of a guaranteed period as part of a life insurance policy design started in the 1990s. It allows an insurance company to charge only R800 per month for life cover, if the assumptions that have been true in the past continue to hold into the future. If the future actual experience aligns with the expected experience, then the premium will stay at R800 per month. But if the future experience changes, then a life insurance company is allowed to review the future premiums clients need to pay. That review only happens at the guaranteed review date, generally after five, 10 or 15 years – this period is decided when the policy is purchased.
Many customers over the last 10 years have been reminded of this feature because their insurer has notified them that their premium is going to change. It is critical for FAs to have conversations with their clients about a new or existing policy, how long the premium is guaranteed and when it is due to be reviewed.
What could end my marriage?
In the same way that changes in lapse rates influence a premium, changes in mortality rates influence the cost of life cover. There are two opposing forces at play with mortality rates. One is improvements in medical technology and access to healthcare that are helping us to live longer. The other is the poor lifestyle choices many of us make. Depending on the insurance risk pool, the effects of the latter group could outweigh the former, also putting upward pressure on life insurance premiums.
Many life insurance companies are adopting different tactics to encourage better lifestyles. When a client takes out life insurance cover they become part of a “risk pool” of lives with whom they are now sharing the risk. It is important to help your clients understand that their own health actions, and collectively those of the whole group, will determine whether their premiums go up, stay level or come down at future review dates.
Will we support each other financially throughout our marriage?
A successful marriage invariably relies on both partners being aligned on financial matters. Too many individuals end up living beyond their means, getting into debt and then allowing their debt-spiral to ruin their lives – and marriages.
When a financial advisor first engages with a client, ideally, they will walk the client through their own financial needs analysis and help them develop their financial plan for navigating the future. Thereafter, the FA will review this plan on a constant basis. Remember the importance of “ongoing, regular communication” in a marriage.
Your clients’ needs will change – getting married or divorced, having children – and their financial situation will change… again, “for better, for worse”. It is at these times that the client should sit down with you to review their financial plan, and make sure they remain on the right path to sustain, grow and protect their financial health and prosperity.
Your life insurer must do the same thing every year – illustrated by their annual financial statements. A life insurance company is required to hold reserves to ensure they can pay the claims they expect to pay, even when an extreme event such as Covid-19 arises (or floods, for a short-term insurance company).
In the same way, FAs should make sure their clients can access short-term cash in an emergency and have protection in the event of an illness that threatens their ability to earn an income. FAs would do well to remind clients that as the breadwinner, their ability to earn an income is their most important asset. Not their car or even their house. Think about that for a moment. Have your clients protected that asset sufficiently? So often clients jump to protect their house and car from damage – but do they do the same when it comes to protecting their ability to earn?
What are the perks of marriage?
In a life insurance context, make sure that you and your clients have a proper understanding of all the benefits and extra perks that come with their life cover, such as loyalty and rewards programmes. Insurance companies can’t force clients to join these programmes – there are laws against “inducement” – but clients should appreciate how their loyalty to and support for a particular company could be rewarded.
Like any good marriage, ideally, your clients don’t want to be left feeling that they are “locked in”, so those perks should not influence the underlying cost of their life cover in any way, and hopefully they can appreciate that the eligibility requirements are fair.
If the perks of marriage remain attractive, then there is every likelihood of the marriage going the distance.
