The Financial Coach™ - Managing people & their emotions around money » Insurance

Do I need a haircut?

Gregg — Fri, 24 Jun 2011 09:16:19 +0000

“Do I need a haircut?” is not a question one normally asks a barber. Of course the answer will be yes. Likewise, “do I need insurance?” is not a question one normally asks an insurance salesman, especially when his/her income is derived from the sale of product.

Among the clients I meet there is traditionally a deep suspicion of insurance sales people and often (in my opinion) this is appropriate. All the statistics released by the life insurance industry point to the “fact” that people are generally under-insured. This may well be the case but I cant help but be suspicious of an industry that points out the general underutilization of the very product that it sells. It may well be that people are generally under-insured but I also hold the suspicion that among those that are insured, there are many that are in fact, over-insured.

Over-insured? How is that possible?

In my experience the greatest area of over-insurance is around disability and specifically income replacement cover. The usual scenario goes something like this…

The client is employed and is a member of the company retirement fund which has an income replacement disability benefit as part of the scheme. Typically this is 75% of the pensionable income (75% is international best practice – income replacement is never supposed to be an incentive to sit on the beach when you could be working). So for all intents and purposes the client is then insured to the maximum that he or she can claim.

In cases of over-insurance, the client also has some additional income replacement cover that they took out years ago (when they were still studying). They have stayed on the scheme because of the promised bonuses that they will receive some time in the future or on the mistaken belief that they will get paid if they are disabled and submit a claim.

If there is a valid claim, they will get paid – but not by both schemes. At claims stage, insurance companies typically aggregate the income received from all sources and will pay the balance of the 75% of income. So here is the problem and the over-insurance. If the external scheme pays, then the company scheme will probably not (to check this you can write to the company scheme and ask them how they would treat a claim in the event that you were also getting a benefit from the external (private) income replacement policy. They will write back and tell you that they will probably not pay. Probably not? What a waste of money – especially when statistically, your probability of being disabled is around 0.4%*. So why are you paying a(n addtional) premium for something that will probably not pay. You are over-insured and are wasting money!

As I see it, your group scheme membership is compulsory while the private scheme is not. So get rid of the external scheme – even if it means that you will lose some of the bonus – you could invest that money and the premium you were paying and you would end up with a bigger lump sum in the future.

* see the post http://www.thefinancialcoach.co.za/2010/11/19/statistically-unlikely-but/

Unintended consequences

Gregg — Wed, 25 May 2011 11:41:36 +0000

Was chatting with a friend who used to run quite a successful events company…I say used to because he has been directly impacted by the “conflicts of interest” legislation in the financial services industry. As a result of the legislation, companies can no longer “wine and dine” their clients (that is the financial advisors and brokers who represent them).

I understand that the intention behind the legislation is to attempt to prevent advisors being unduly influenced by the product providers who have traditionally spent quite a bit of money in this area. But the response by the regulators is rather “draconian” and is, in my opinion, a complete overkill which has had significant unintended consequences for a lot of small businesses in the hospitality and entertainment industry…there are no more golf days, team building events etc…and there are a lot of small businesses out of business…

So what about the following idea as an alternate proposal?

Companies can publish a register on their websites of who they have “entertained” and the value of the item and any prospective client who suspects that an advisor/broker is offering them a product at a particular company because that company is “incentivising” him/her can simply search the database of that company to verify this. All the information is currently being collated by the compliance departments at the companies so it should be a very easy step to publish a register – that way you can allow the industry to self-regulate and still have complete transparency.

If I have no scruples as an advisor then I can accept as many invitations/incentives as I like from the company and all this information will be available for any client (member of the public, regulator or journalist) to check…you can be sure, however, that any advisor with any bit of integrity will give serious thought to appearing on any companies database…

Any thoughts on this?

Kicking the tyres

Gregg — Tue, 17 May 2011 13:46:42 +0000

Heard from a client this morning who was involved in a car accident…he’s fine but the car’s not – R50000 damage. He was on to the insurers right away who sent an assessor who has rejected the claim. Reason? The tyres are smooth and therefore the car is not technically roadworthy!

We dont do short term insurance and I dont know if this is the end of it (I would take it further) but I do know that when you enter into an insurance contract on your car it is your responsibility to keep it roadworthy at all times – failure to do so can result in a claim being repudiated. In fact the wording on my policy document states that I need to take “all reasonable steps to maintain the vehicle in accordance with the road worthy requirements of any legislation applying in the territorial limits.”

Pretty harsh stuff when you read the fine print and I guess a state of roadworthiness includes things like the the license being up to date as well. Better get out there and kick the tyres!

Just a thumb-suck!

Gregg — Fri, 18 Mar 2011 09:53:17 +0000

I guess there are times in life when a “thumb-suck” might be an appropriate answer but filling in an application for insurance is not one of them.

Had 2 interesting cases recently which again highlight the importance of full disclosure when applying for any form of insurance. The first one emerged when we were reviewing an existing policy for a client that was done through a previous advisor. The issue revolved around her income and occupation which was clearly not correct. When completing an occupation form with her we asked her more about her occupation and her income and how the previous information was arrived at. Her reply? “My broker told me to give him a thumb-suck!” This was clearly not correct and we pointed out the danger of this kind of approach to her – would she like the insurance company to do a thumb-suck when assessing her claim?

The second case had to do with a client applying for some income replacement cover and in the application process it emerged that although she did not currently have a sore back, she was seeing a physio for treatment (mainly preventative in her words). She was reluctant to disclose this on the application form (for risk of a back exclusion and had apparently even been advised by her physio not to disclose this). We pointed out the risk to her in that if she failed to disclose it and it later emerged at claim stage that she had been seeing the physio, then the company could be within their rights to repudiate any claim. In the end she disclosed, the company called for x-rays and as a result of the x-rays which showed a degenerative disc, the cover was granted with an exclusion on it.

While this might seem unfair and harsh on the part of the company, at least she knows where she stands, what is not covered and that at claims stage there will be nothing that she has tried to hide.

You cant afford to thumb-suck when it comes to filling in insurance forms – you don’t get a second chance to become disabled or contract a severe illness!

Now that would be an “out-bonus”!

Gregg — Fri, 03 Dec 2010 07:51:05 +0000

You always get something out – at least, that’s what they promise and that’s how they sell it to you. I’m talking about the “out-bonuses” that direct insurers promise to pay you 5 years from now.

Based on my quote with OutsuranceLife, they “promised” to pay me 10% of the premiums paid over 5 years as long as I have not claimed on the policy. (What’s the point of the insurance if you’re not supposed to claim on it then – but that’s another post).

So let’s look at the numbers: if we assume that my premium stays constant (for the sake of the maths) then over 5 years I would have spent about R22080 on the life cover (R368*60) and I should get an “out-bonus” of about R2208.

Now if I opt for the traditional life cover (with full commission on it) then I would pay R205 pm and if I then took the difference between the 2 premiums (R368-R205 = R163) and stuck that under the mattress for 5 years I would have about R9780 at that stage. And if I went for the real no-commission option then I would have about R13080 after 5 years. Now that would be an “out-bonus”.

So at this stage, I cant see any benefit of using OutsuranceLife or 1Lifedirect…ever!

The numbers dont lie…

Gregg — Tue, 30 Nov 2010 11:58:52 +0000

Following on from my post last week about direct insurers being so much more expensive than normal insurance companies (even at full commission) I thought I would get a few quotes from them. I asked for R1million life cover for a 44 year old male, non-smoker, top income and health bracket and this is what we got back. We also tried to compare apples with apples and so the premium escalation structure is a simialr as we could get them.

Company	Premium
OutSurance Life	R 368
1Lifedirect	R 374
Instant Life	R 178
Altrisk (commission)	R 205
Altrisk (no comm)	R 150
Discovery (comm)	R 283
Liberty (comm)	R 375
Sanlam (comm)	R 380
Met Odyssey (comm)	R 204
Momentum (commission)	R 221
Momentum (no comm)	R 187

Not only are the direct insurers more expensive than the traditional companies, but they are more expensive even at full commission and they claim to cut out all of that. Would love to hear an explanation from them on this. I think it might be bordering on misleading advertising.

There is only 1 direct insurer that really is cheaper but then you would not yet have heard of them because they have not yet spent millions on advertising – I guess that is why they are cheaper at this stage.

So for my money, if you want to go direct, then go to Instant Life, else use a broker – even at full commission you are better off (by far) than Outsurance or 1lifedirect.

Lies, damned lies and direct insurance!

Gregg — Thu, 25 Nov 2010 07:48:51 +0000

There seems to be a big drive by the direct life insurers at the moment with vast amounts of money being spent on some very expensive prime time television advertising…Outsurance Life is the latest culprit. The direct insurers may differ slightly but their big claims are all the same…”cut out the middleman”, “no broker, no commission”. The (not so hidden) message is that using a broker is expensive and therefore if you go direct you are going to save because you have got rid of this (unnecessary) expense.

As I have written many times before, go direct by all means, but don’t be naïve about it. Someone (that would be you) is paying for all the expensive advertising and infrastructure. If you are cynical about using a broker then do yourself a favour and get a quote from one of the direct insurers and then get a comparative “commission-free” quote from one of the “traditional” insurance companies. My experience has shown that the direct insurers are even more expensive than full-commission quotes and when we remove the commission from the quote, then they are stupidly more expensive. So much for saving by going direct and cutting out the middleman.

One of the direct insurers even offers a 30-day money back guarantee if you can find a cheaper premium on the same cover. Well here is a news-flash for them. I did a quote on their system and they can offer me R1million for R178 per month. A comparative commission free quote through a traditional insurer for the same cover is R1million is R150 per month (that’s almost 19% more). Interestingly, they have also increased the cost of their cover since I first did a quote. Guess I wont be using them then…

Statistically unlikely…BUT!

Gregg — Fri, 19 Nov 2010 13:57:39 +0000

According to research conducted by True South Actuaries & Consultants and the Unisa Bureau of Market Research, South Africans are hopelessly underinsured for death and disability. This is not new research or the first time that this conclusion has been reached. But what is new is that for the first time, at least as far as I can remember, they have actually released the numbers behind the research and as result we can know the number of working South Africans that are likely to die or become disabled in the next year. The research also showed that it is not the low income earners who are most at risk – in fact, consumers earning more than R16 500 are the most likely to leave their families with the biggest financial shortfall when they die or become disabled.

According to the research there are about 12.4 million working South Africans and of these about 52000 are likely to become permanently disabled in the next year. 52000 – that’s 142 per day!!! That’s a lot of people. When you do the maths, however, it amounts to about 0.4% of the working population…so it is statistically unlikely to happen to you (thankfully). But what if it does?

And that’s the question that needs answering.

As the major breadwinner in our household, my disablement would be financially devastating and so that’s why I have insured the risk through some income replacement cover. This, in my opinion is the best way to cover this kind of risk (and the premium is tax deductible). But before you rush out and buy this cover first find out what cover you already have through your company retirement fund or through your existing policies and please don’t cancel any old cover before you have new cover in place.

As far as the death rates are concerned, about 3 times as many working South Africans will die in the next year (160000). Again, you need to consider the financial impact of this on your family and if necessary, you need to take out some more life cover. It is not expensive – but please, stay far away from 1lifedirect and Outsurance Life. I will write more about them next week but their products are exceptionally expensive – despite their advertising “no brokers” and “no commission”.

DIY by all means, but…

Gregg — Wed, 18 Aug 2010 16:46:49 +0000

I have long been an advocate of people doing their own financial planning. Far too many vested interests in the industry would have us believe that Financial Planning is too complex for individuals to do their own and that as a result they need the services of an advisor/financial planner. Bollocks I say. There is so much common sense involved that just about anyone with a brain and some time and effort could do their own financial planning (there is no need for it to be complicated or out of reach of Joe Average).

However, to my mind, doing your own financial planning could be likened to fixing the plumbing at home. Any one could do their own: get the instruction book, get the correct tools and parts and then spend the time fixing it. While this might provide an element of satisfaction to you, it could end up taking 2-3 times as long as it might the plumber (and lead to plenty of frustration and fowl language) and you might need to do it over because you did not do it right the first time. Or, you call the plumber. It is about the maths…you need to know how much your time is worth to you versus what it would cost the plumber. Either you spend the time fixing it or you call the plumber who will probably get it done right the first time in a fraction of the time and at a fraction of the cost.

And so it is with financial planning – you do it yourself or you can call the financial “plumber”.

Partly as a result of the DIY approach there has been a proliferation of “direct” insurance companies that have sprung up over the past years encouraging people to go direct, to cut out the middleman, to save on commissions and fees…and while this all sounds very attractive it is, in my experience, hardly ever true.

I wrote a while back about how expensive 1LifeDirect is compared to using a broker (http://www.thefinancialcoach.co.za/2010/03/18/1-life-direct-misleading-advertising-so-expensive/) and now it is the turn of new comer, OUTsurance Life.

I finally managed to get a quote from them after a few emails, a blog post about their poor service and then spending 40 mins on the phone with a very polite and friendly call centre agent. Towards the end of the conversation as he built up to the crescendo of his sales pitch he proudly announced to me that I was an “excellent” candidate for life cover with them and that as a result I would qualify for a very competitive premium. Bearing in mind that they have advertised that there was no advisor and therefore no commission on the policy I was expecting something quite attractive.

And here is the problem – it was R220 per month (almost 53%) more than a comparative quote through an insurance company (where the commision has been removed) and even with full commission on the comparative quote it was still 22% more (see below).

So let the old warning apply: Caveat emptor – or Let the buyer beware. By all means follow the DIY approach and go direct but beware – there are a lot of “lies, hype and spin” (also known as marketing) out there and just because it says there is no advisor and therefore promises to be cheaper, it does not necessarily mean that it is. My advice is this – rather find an advisor/planner who can supply you with the product you need without the commission costed into and and pay him/her a fee for the work that they do for you.

Comparative quotes from OUTsurance Life and Altrisk Insurance Company for a 43 year old male – R2million life & R300k dread disease cover:

OUTsurance (no commission): R644 pm

Altrisk (with commission): R529 pm

Altrisk (no commission): R422 pm

And on top of this, OUTsurance promised me an OUTbonus of about R3800 in 5 years time…attractive indeed but if you take the R220 that you would save by using the Altrisk product and saved it for 5 years (without any growth on it) you would have more than R13000 in 5 years time. Now that would be a BONUS!

OUT is not In!

Gregg — Mon, 16 Aug 2010 15:48:14 +0000

About 2 weeks ago I responded to an online advert by OUTsurance for Life cover at significantly reduced premiums (because they were cutting out the advisor and therefore the commission). Within “minutes” I received the following email from them acknowledging my request for a quote:

“Thank you for requesting an insurance quote from OUTsurance! We are committed to AWESOME service and will do our best to quote a premium that really suits your pocket. One of our highly trained advisors will call you shortly to complete your quote. And just in case you had any doubts as to why we are the largest direct insurer, see attached a brief summary of our product features and service offering!

Regards, OUTsurance”

Despite the promise of AWESOME service I heard nothing for a week. And so I contacted them again and again I received an acknowledgement promising me that my request would be sent to the appropriate person for an immediate response. Still nothing…

And that is a problem with going direct (or cutting out the advisor) – there is no one to speak to, no one who is really interested and my “urgent” need for life cover has not been addressed.

Around the same time I was contacted by a client who was looking for life cover. He had heard that we charged a fee for the work we do, that we do not earn any commission and that as a result his premium would be significantly lower (up to 30% less).

After explaining to him how we worked he asked me to get some quotes for him and told us that it was urgent as he was going away on the 15th August for a month and wanted the cover in place before then. We duly sent him the quotes and then the relevant application form which he completed and sent back to us on Tues 10th August. The case was underwritten the same day, medicals were done the next day and the case was issued on Friday the 13th…now that is AWESOME service by the relevant insurance company (Altrisk, for the record).

If the client had gone “direct” he would still be waiting for someone to return his call…

And IF, OUTsurance ever get back to me, I will write a follow up post comparing their quote with what we can get elsewhere.