Are you still paying traditional rates on your life assurance needs? The past 5 years has seen innovative developments in life assurance product pricing and benefit design. This reengineering of product design and pricing has resulted in life assurance, disability and critical illness cover products being up to 40% more cost effective for the same or improved benefits.

With this disruptive innovation in product pricing , we know life assurers have and continue to overprice their life assurance products. This has been highlighted as a common and profitable ‘error’ in the pricing methodology of assurer’s products.

The ability to ensure the behaviour and trajectory of clients’ cover precisely tracks the changing shape of their needs over time. This is referred to as fracturing of cover. By fracturing cover, it now delivers an average of 40% more cover today, and sustainable cover for life.  Fracturing cover and pricing each need appropriately results in significant premium savings of 30% on average compared to traditional blocks of cover of traditional life assurers’.

Although reducing premium is important, one should not be sacrificing benefits and the structure of how benefits are paid on claim are assessed and paid. Over the past years through research and investigation of when claims have not being paid, we have come to learn of the differentiating ‘fine print’ in policy documents.

When studying the policy fine print,  you learn what is actually covered and what is not, what we think we covered for and what is not covered is not always aligned. It is only at claim stage that a client of an assurer will really know and test whether the claim will be paid. There are a number of clauses that protect the assurer from paying a valid claim.

The risk-based approach provides the life insured the highest benefit for the cost, the widest coverage spectrum, and a greater transparency of when a claim will or will not be paid.

The needs matched approach will provide industry leading range of benefits, sustainable premium patterns and cover that is flexible enough to be adapted during your course in life.  Although there are a number of important factors to consider when owning assurance cover, the following two are vital.

Premium efficiency

Premium efficiency is tested when you save up to 40% in premium, improve the benefits covered at the same annual prim and product increases. Clients’ are hoodwinked when a broker sell a product cheaper however has made substantial changes to the way the premium will escalate and the type of benefits cover. Beware, some assurer may be ‘cheaper’ than another, but there is a sacrifice somewhere in the policy being purchased. The only way to effectively price a life assurance policy is to change the methodology. The traditional assures have not been able to do so in their current systems.

Typically across the industry, premium increases exceed cover increases over time. The graphic demonstrate this risk to the client as the initial cover purchased increases by double over time while the premiums increase substantially by 3-4 times the initial premium. An unsustainable premium pattern, resulting in terminating the policy when most required!

Client buying down

Another consequence of this unsustainable premium pattern to the level of coverage is mainly felt a few years while with the assurer, when a client is forced to buy down, sacrificing cover due to affordability. The life assurance company is well aware of this and reaps the additional profits from years of receiving premiums with no claims.

To protect against the premium becoming unsustainable requires pricing a premium differently upfront. Premiums are adjusted and quoted on a term basis, however the cover provided is for life, allowing ongoing savings.  In this way the policyholder benefits with up to a 40% saving.The ability to tailor cover to track each need over time is a vital ingredient to cost savings.

Premium sustainability over the long term

A financial planner or broker should be able to channel savings on every portfolio review if following a risk-based  needs-matched methodology. Funding patterns are very important for clients to obtain the highest ROI from their life assurance purchases.

The reason clients terminate their policy coverage is normally due to the lack of affordability in the later years as the premiums originally quoted with a set increase do not match the real increases experienced. We have witnessed daily a premium increase set at inflation however the premium increases at inflation +5%.  This is the unknown risk in premium sustainability.

To check this on your own, review the long-term premium projections for each level of cover received and thereon consider the future sustainability of the policy. The following factors are taken into consideration:

  • The chosen benefit escalation (yearly growth in cover)
  • The chosen premium increase in excess of the benefit escalation (yearly growth in premiums, over and above the yearly growth in cover)
  • An analysis of any additional age-rated increases to provide for the increasing cost of cover over the term of the policy.
  • Claims certainty

Claims Certainty

When purchasing a policy, ask how claims are paid. This is vital to what is covered and what the actual definitions in the policy document mean? If the advisor or broker cannot distinguish between different assurers policy definitions, consider finding an advisor who understand the legal jargon.

Existing claims definitions in the market are often opaque, subjective and may pay out on either an occupational definition or a medical definition. They may also contain barriers to claim leaving you exposed and uncertain, posing further risk to the portfolio.

Clients expect that claims criteria should be objective, and comprehensive. Assurers’ should relate and offer an illness and injury focus, with defined medical definitions and an independently assessed own-occupation underpin to increase the chances of a valid claim.

A lack in transparent definition disclosure is also a major concern and potential non-payment risk at claim stage.We suggest that clients have upfront definition disclosures. In this way the life assured has greater protection and certainty when it comes time to claim.

On purchasing a life assurance policy, along with all the dread diseases and disability covers, it is not as simple as one thought it be. Advisor’s worth their salt will be able to design a cost effective optimized portfolio that provides coverage for all your needs and reduces all potential risks of a claim not being covered and paid at claims stage.

Peter Šmanjak

Owner and Founder at Infinite Risk

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