Encourage appropriate short-term decisions for long-term reward

Chris de Klerk, PPS Insurance: Corporate Actuary, explores the long-term impact of hasty, short-term decisions around insurance policies.

There’s no doubt that consumers across the board are feeling the impact of the economic downturn. In the past two years, food and fuel prices have soared and the economy has generally slowed down. Recent interest rate cuts have sought to ease the pressure on consumers, but not before many had already begun drastic cost-cutting measures, most notably by discontinuing premium payments or seeking low-cost alternatives for their insurance needs.

Recent media reports indicated that the value of lapsed life insurance policies rose by a massive 40% last year, pointing to consumers’ inability to afford policies that were taken out before interest rates and the general cost of living increased so dramatically.

While this trend was most prevalent within the low-income earners bracket, other sectors of the market are being lured with tempting, low-cost alternatives, which promise to help ease households’ financial burdens.

But changes like this, made under financial pressure, can be very costly in the long-term. The task of a broker or financial adviser is to ensure that the client not only looks before leaping, but also understands fully what’s waiting in the more distant future.

Replacement policies have increasingly come under the spotlight, as consumers seek to tighten their belts. People will always look for better or cheaper deals; that’s perfectly understandable. Insurance companies are also constantly refining and improving their products. Thus, one of the broker’s tasks is to help the client review his or her policy portfolio in the light of new developments.

Advisers need to remember that they are required both morally and by law – the FAIS Act – to act in the best interest of the client. ‘Best interest’ means long-term as well as short-term, and it’s critical that advisers guide clients through this difficult process. A quick, short-term gain may be highly detrimental in the long-term and brokers can be subjected to legal action for damages, if a client can demonstrate that the adviser has given poor or inappropriate advice.

Consumers will attempt to cut back on both short-term and life insurance, but the latter is especially fraught with difficulty, because of its complexity.

It is almost never a good time to cut back on a life policy; accrued benefits may be lost, additional costs may be incurred by cancelling one’s policy and then again by taking out another. When assisting a client in making such a decision, it’s also critical that the adviser is certain that the comparison is ‘apples-with-apples’ and not ‘apples-with-something very different’. To draw those distinctions across a 20- or 30-year timeline requires a high level of professional skill and knowledge.

Finally, the adviser ought to remind the client that not all insurance companies have the same level of understanding when it comes to the needs of the individual. When dealing with graduate professionals, the adviser needs to have applicable skills and understanding of the client.

As an adviser, you need to look at your product provider, where its core market is and what expertise it has to operate in that market. This will empower you to provide your client with the most appropriate products and services.