Tag Archives: Insurance

Do I need a haircut?

“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 https://www.thefinancialcoach.co.za/2010/11/19/statistically-unlikely-but/

 

Just a thumb-suck!

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!

The numbers dont lie…

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.

1 Life direct – misleading advertising & so expensive!

Just saw the 1Lifedirect TV advert again this evening and it really gets my goat – their advert is so incrediblymisleading. It should come with a huge health warning similar to that on cigarette packets. They were offering a 44 year old male R1million life cover for just under R500 (if i remember correctly) and at the same time boasting about how cutting out the broker would save up to 22%.

While the 2nd part of the claim may be true, what is distressing is that I can buy R1million life cover through an insurance broker for about R190 per month. If I cut out the commission (broker) then that drops to about R144 per month which is less than 1/3 of what they claim to be able to offer without any commission on it.

What an unbelievable bunch of thieves! They are just like any of the other insurance companies in this country and on top of that, their claims to cut out the paper work could provide you with some very nasty surprises come claims stage.

Based on the quotes above, I would opt for the services of a broker every time – even at full commission.

Sometimes cutting out the middleman just leaves a gaping hole!

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I recently received a marketing offer from 1lifedirect to take out some life cover directly through them, thereby cutting out the paperwork, expensive medicals, the broker and therefore the commission. All of this, they promised, would save me up to 22% on the premiums.

Having seen their rather funny TV adverts and being the curious sort I decided to give them a call to see if things were as good as they promised. After all, their flyer offered me R500000 life cover for only R140 per month (subject to certain terms and conditions of course).

On the face it of their offer sounds quite attractive – but on further investigation it is anything but so. Some comparative quotes to see what I could get elsewhere revealed that I could get R896000 life cover for R128 per month (with full commission on the policy). The same cover without any commission on the policy would cost just R100 per month – now that is a saving of 28% on the full commission quote and is over 50% less than the 1lifedirect quote. So there really is no saving of anything and in fact, sometimes cutting out the middleman could turn out to be quite a bit more expensive.

The 1lifedirect offer is not nearly as good as it initially seemed and far from it being a quick and convenient process they could not give me a quote over the phone because of the fact that I do the occasional scuba dive. The quote needed to be done by their actuaries…7 working days later and still no quote from them despite 2 follow up phone calls from me. By this stage, the average insurance broker would have had the case finalized and issued and I don’t even have a quote. Sometimes going direct is certainly not a quicker or more convenient process.

1lifedirect also say that they cut out the need for expensive medicals – for the record, most medicals are paid for by the insurance company concerned. This is certainly the case where the insurance company is the one that calls for the medicals. Sometimes going direct can mean that you stay ignorant of the facts.

1lifedirect also claim that they cut out the need for paperwork. Far from this being a pro it could turn out to be a real negative the next time you apply for insurance cover; no paper work means that you have no record of what you answered on the medical questions and no record of answers significantly increases the risk of accidental non-disclosure. As a consequence this significantly increases the risk of a claim being repudiated by the insurance company (because of the accidental non-disclosure).

So, far from being “life insurance that is quick and convenient, and that – by cutting out the broker – saves you money!” in my case, the offer by 1lifedirect turns out to be significantly more expensive, not so quick and also potentially increases the risks when applying for future insurance.

For the record, I have no problem with people going direct. To me it is much like fixing the toilet at home – I can do it but it will take time and effort and I might not have the necessary tools. Either I invest the time and energy or I pay a plumber to do it for me.

In the same way, if a broker can’t add value to the client and he/she knows what they want and has the time to do it then there is no reason that they should not go direct.  They just need to be aware that it may not always be the best option and that while in some cases it may appear to be cheaper it could turn out to be a very costly exercise.

Sometimes cutting out the middle man just leaves a gaping hole.

That’s all for now.