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What's ideal?

New Zealand insurers, along with their Australian counterparts, have arrived at a strange place: mainly rate-for-age insurance is sold. Combined with the requirement to model the 'ideal' package, results in insurance policies that cost 10-15% of all household income. The fact that they are rate-for-age means that for clients in their 40s premiums will increase at 12% to 14% per year plus inflation. This isn't ideal. It most cases it isn't even logical, it doesn't help clients buy meaningful cover, and even if they do buy - it isn't sustainable.

Sure, there are exceptions. Affordability questions may be swept aside by a determined buyer, prioritising cover over other expenditure. Sometimes there may be a temporary fall in income, and while current affordability may look suspect, future affordability, for reasons not clear to us, will be fine. But these are the exceptions. On average, the incomes of people in their 40s will rise by 2-3% per year, not 12-14%. It is hard not to see this as lapse generation proposition.


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J-P Hale

And this is the challenge. The pricing of level premiums is such that it impacts affordability for the breadth of cover now.

In an ideal world the risk for a client should be declining over time, which should translate to a reduction in cover needs.

We know with people continuing to upgrade on the property ladder that they typically go up before they come down.

The other issue is the resulting challenge of being stuck on a product that won't do the job. Less likely with the passback of benefits most insurers have now, but is still a future risk for clients.

The rule of passback is it's passed back provided it doesn't impact premiums. Which is part of the challenge. Future developments which become options with additional premium or benefits that do impact premium will not be passed back.

This leaves the client on a level premium exposed to not moving when they should due to the often large gap between present premium and the current premium of the day.

It's not an easy one to balance, more useful cover today or better affordability of cover later.

My own view, born out by claims, the widest cover approach today is far more useful than the certainty of affordability later.

The risk of not taking medical or income protection because of the future premium selection can mean they have no cover when they need it, because they didn't have the right cover when they needed it.

It's not an easy decision, and one that needs to be put to clients as part of the advice process for clients to decide, as they ultimately have to live with the decision not us advisers.

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