Is life insurance really for life?

The inefficient structure of existing life insurance products impact value and sustainability of cover for clients. BrightRock’s needs-matched life insurance addresses these shortcomings by pricing cover correctly for the term and trajectory required.

Life coverSince its launch in early 2012, BrightRock’s needs-matched life insurance offering has helped to drive a change in mindset in the life industry. Needs-matched life insurance challenges some of the most entrenched beliefs about how risk cover should be structured to meet those needs.

According to Schalk Malan, Executive Director at BrightRock, for many years, the life industry has been providing blocks of cover that grow – to a maximum term,  usually retirement age – with a premium that increases too.  However, he says that as clients reach retirement age, their risk profile changes; indeed, industry statistics on claims confirm that clients actually reduce their cover over time – they have fewer paycheques to protect and large debts are settled.

Yet policyholders’ policies are designed – and priced – to provide the highest level of cover when their insurance need is lowest. This is confirmed by the True South insurance gap study, commissioned by the Association for Savings and Investments of South Africa (ASISA), which found that earners in the older age categories tend to be over-insured. The study found that “the insurance need for older earners is a much smaller multiple than current earnings compared to younger earners.”

Malan concurs, citing the following example: “For a 60-year-old male, the likelihood of a disability claim is nine times higher than it is for a 40-year-old male. So it would be reasonable to anticipate that the disability claims of 60-year-olds would be nine times higher than those of 40-year-olds – for the same cover in force. Yet our analysis of three life insurers’ claims data shows that the disability cover paid out for policyholders over the age of 50 years is in the region of 85-95% less than expected. This proves that there is a massive reduction in the level of cover in force by the time the clients reach the age bands over 51 years.”

“This lower level of cover in force closer to retirement age demonstrates that clients are reducing their cover with time because their financial exposure and need for cover is reducing too or simply just lapse out of the system because of affordability or complete change in needs. And, due to underwriting limitations, they cannot then seek cover on another product like critical illness.”

However, the average capital disability policy sold in the market is priced to retirement, usually about 25 years and it is set to grow over this period. What this means for the consumer is that, in effect, when looking at industry claims data, most policies sold today are priced to increase for the term, but behave like decreasing term insurance products – yet clients are paying from day one for increasing cover priced for the maximum policy term, leading to premium waste.

Says Malan, “In effect, clients are paying a considerable amount for wasted premiums – they are paying from rand one for the sacrificed cover which could have secured much more efficiently and appropriately structured cover upfront. In addition, clients are less insurable at older ages. Should they later need to increase cover for critical illnesses, they may find that they’re no longer insurable.

“Because needs-matched cover is priced accurately for the correct term based on the client’s financial exposure, BrightRock clients get almost double the cover up-front. BrightRock’s needs-matched life insurance is the only life insurance that sets and prices cover to map the trajectory of the client’s actual financial need at every point of the policy’s duration.”

The efficiency applies not only to capital disability cover but to life cover too, so on average, BrightRock clients are able to buy about 40% more cover on their whole policy using needs-matched technology than they would with a competitor for the same premium. “Considering the R24 trillion gap in life insurance cover – and the role that affordability of premiums plays in these high levels of underinsurance – needs-matched premium efficiency can help financial advisers close the gaps in their clients’ cover,” says Malan.

Malan discussed these issues against the backdrop of anticipated regulatory change in the life insurance industry, including the Treating Customers Fairly framework and recent Retail Distribution Review (RDR) proposals, which seek to prevent mis-selling and secure better outcomes for clients. “BrightRock was born of this new TCF era and our product design has in many respects anticipated the changes that are currently being mooted.”

According to Malan, in this changing regulatory environment where the focus is increasingly on meeting consumer needs, BrightRock’s needs-matched design creates significant opportunities for the life insurance player going forward. Malan has been invited to speak in Germany and Australia about BrightRock’s product structure and the way it addresses the regulatory and consumerist challenges faced by the life insurance industry internationally.

“We’re excited about the possibilities this new technology creates – not only for the growth of our business, but for the future of our industry,” Malan concludes.

What does this mean for consumers?

Malan suggests that policyholders meet regularly with their financial advisers to check the level and term of their capital disability cover, and ensure that it’s right for their needs. He has the following tips for you and your adviser:

  • Check for underinsurance at younger ages. Your greatest financial asset is your ability to earn an income, so it is important is protect your future paycheques until retirement. And while you’re more likely to suffer an illness or injury the closer you get to retirement, your financial exposure is highest in your 30s and 40s when you’ve got more paycheques to cover and a higher outstanding debt on your home loan.
  • Check for over-insurance at older ages. If your cover is set to grow steeply over time, you may be overpaying today for cover that you’re likely to reduce anyway as you get closer to retirement age and your financial exposure decreases.
  • Ask your financial adviser about your premium funding pattern. Often, if affordability is an issue, your financial adviser may choose an age-rated funding pattern for you. This means your cover may start off cheaper at the outset but may increase steeply as you age, with your cover increasing too. This may prove unsustainable in the long term, forcing you to reduce your cover down in future as premiums get higher. It’s possible to increase your initial cover at a sustainable premium today, by setting your cover and premium increases to align to expected changes in your financial exposure over time.
  • Secure your future insurability today. One of the biggest problems with policyholders adjusting their cover down in future is that they’re not only sacrificing the value of the premiums they’ve already paid for cover to retirement age (the policy is priced to retirement age from day one, so you pay for future increases from your very first premium) but also the loss of insurability. If your needs change in unexpected ways – for example, you find you have to work longer than you planned, setting your retirement back a few years – after you’ve reduced your cover, you may need to undergo underwriting again (medical tests to check your risk). If your health has deteriorated since you were first underwritten, you may pay much more for cover or find you can’t get the extra cover you need at all. There are products in the market – usually at an extra charge – that allow you to buy more cover at a later stage without having to undergo underwriting again. Malan cautions that some of these products do have limitations, such as limits to the kind of cover you may buy or specific timeframes when you may use this benefit. BrightRock offers various options to allow you to secure cover in future should your needs change, free of charge, on all its standard policies and without many of the restrictions that you may have with other insurers in the market.

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