The Case For Advised Life Insurance Solutions

PPS Mutual’s Michael Pillemer presents the case in this article for why consumers will be better served when dealing through an adviser for their life insurance needs…

Despite the headlines, insurance advice can be critical
Following the conclusion of the Royal Commission process, it is now safe to say that the financial advice industry’s reputation has taken another battering. Further regulatory and market changes, including removal of grandfathered commissions and the imminent sale of some large vertically integrated advice groups, are now afoot as the industry struggles with the burden of consumer distrust.

However, one area of the industry where the discoveries of the Commission were not so clear cut was life insurance. While there were certainly some case studies heard around inappropriate products being recommended to clients by advisers, the spotlight at the Royal Commission was on the sale of policies to vulnerable members of the public over the phone – known as direct insurance.

The final report served serious consequences on this sector of the insurance industry, most notably the proposed prohibition by ASIC of outbound phone-based life insurance sales. The report emphasised the importance of quality advice in improving outcomes in the industry, saying the most damaging case studies of the Commission’s hearings involved consumers who were “…unlikely to be armed with the information they needed to assess critically the features of the (usually complex) product that was being offered.”

Following the public scrutiny of both financial advice and direct insurance over the course of the Commission’s hearings, consumers who need life insurance to protect themselves financially may be asking themselves which channel they can trust to provide the best outcome in terms of product quality and security. The answer is that financial advice is still the best way for consumers to ensure they purchase the right type of life insurance that will not be denied at claim time.

Indeed, the Association of Financial Advisers recently criticised the Royal Commission final report, claiming the inquiry failed to acknowledge the value of financial advice. In a paper released by the association in March, AFA general manager of policy Phil Anderson said Commissioner Hayne’s final report failed to acknowledge that most financial advisers work for the benefit of their clients. “[The Commission] seems to have little idea what a good adviser does for their clients or understand the impact they can have on financial and emotional outcomes,” Anderson said.

Adviser value at claim time

Recent data from the Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority backs this assertion, revealing that over the year 2018, 87% of TPD insurance claims were paid where the policy was purchased through an adviser, while just 59% were paid where the policy was bought directly.

This is because not only will a good adviser advocate for the insurer to pay the claim efficiently, but they will also help the client understand the underwriting process and any disclosure obligations when they purchase the policy. This drastically reduces the chance that the client’s claim will be denied down the track, as misunderstanding of these technical issues of the policy is one of the most common reasons for claim denial.

Delivering the right solution for the client’s circumstances

Life insurance complaints are also usually claim related, but they can likewise occur if a consumer is being overcharged for cover or benefits they don’t need – another common issue raised during the insurance hearings of the Commission. Again, a good adviser should be able to help their client strike a balance between premiums that are affordable for their income level, and a policy that ensures there are not going to be gaps in their coverage if they have to be off work for a considerable time.

The issue of product quality is important when it comes to life insurance. Advised products tend to have better definitions and a wider range of policy options that can be customised to the client’s circumstances, financial commitments and life stage. Direct insurance products have much simpler features that can’t be dialled up or down in this way.

As a result, these products tend to be easier for your everyday consumer to understand, but they are also unlikely to be able to address every aspect of cover that is needed to protect a person’s livelihood. The spread of scores from research and software company IRESS, which provides product ratings for the life insurance industry, illustrates this point – out of a total score of 100, advised products are typically rated between 70 and 100, while direct products rate between zero and 70.

Regardless of the issues that no doubt need addressing in the industry, consumers shouldn’t let the fallout from the Royal Commission deter them from taking out life insurance, and more specifically getting the right advice around that insurance. It could be the most important financial decision they and their family ever make.

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