That old adage “life insurance is sold, not bought” still gets uttered today when the distribution of protection insurance comes up in conversation, although perhaps “recommended” rather than “sold” is the appropriate word these days.
Customers still do not usually wake up thinking “I must buy some life insurance today.” The same is true of critical-illness cover, which these days is an increasingly popular add-on or alternative to life insurance products.
A fundamental element of any recommendation is price, which, in practice, for customers means affordability. No matter how appropriate and suitable the recommendation, a fundamental in any decision to proceed is affordability and need.
The increases on guaranteed premium critical-illness products during this year are making the affordability equation more complex for advisers and their clients. Guaranteed premiums will still be within the affordability range for some people but this may not be the case for others.
The decision has been made more complex with an increase in the number of reviewable premium alternatives available from providers. These alternatives bring with them other factors to consider apart from price.
Premiums for reviewable products will in many cases be fixed for the first five years of the term and then reviews will be conducted after that point.
It is vital that customers not only understand when such a review will take place but what the reviews will involve and what they could mean for premiums thereafter. The basis and criteria used to review are therefore key.
There are a variety of approaches defined in the market. The detail is important for individual customers so that their expectations when reviews arrive have been appropriately prepared and managed.
There is often apprehension when the word reviewable is used in connection with insurance or protection products due to concerns over what that might mean for future costs.
The criteria involved in reviews of critical-illness premiums under term insurance plans are very different from the major-ity of those conducted under other life insurance products to date, namely reviews for unit-linked whole of life products.
For whole-of-life contracts written on a maximum cover basis, it is taken as read at the outset that a substantial increase in the premium will always be required after review to maintain existing levels of cover.
Second, whole-of-life reviews, as well as taking levels of current premiums into account along with charging structures, take a view of future investment returns as a crucial component.
On the other hand, the position for term insurance critical-illness cover is substantially different. Maximum cover is not relevant and future investment performance for a customer is not a factor.
Being pure risk products, the approach reflects the nature of that particular product structure.
A transparent and straightforward example would therefore be expected to include the following in any review process.
A clear statement when reviews would be conducted – for example, every five years.
Exact information on how long premiums would remain fixed – for five years and for each five-year period following a review.
Details of the factors or criteria that will be taken into account during each review. These could involve an assessment of the underlying assumptions relating to the expected future number and timing of claims made for the type of policy, including an analysis of the provider's claims experience, industry claims experience and the expected impact of future medical advances, that is, it is not based on the individual client's health.
A statement that changes to premiums will be fairly assessed to reflect any changes in the above underlying assumptions.
A helpful inclusion could be that if the premium level indicated by the review is within five per cent of the then current premium payable, the premium will not change at that review.
It is also important to have a statement of what will not form part of the review process and this would generally be the current state of health of the individual.
Informed choices are then possible when a full assessment of the review criteria is positioned along with premium. Proper comparisons can then be made with the alternative guaranteed premium.
The availability of affordable choice must be good for customers but cost at the outset is certainly not the only factor.