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Going beyond life stages in assessing risk

01 August 2012 Ryan Chegwidden, Altrisk

The past decade has seen an evolution towards the life stage approach of assessing your clients’ risks. Financial advisors using this method tend to place their clients in “boxes” or “categories” possibly without due consideration for their individuality. To date there is no research-backed evidence to support applying a life stage only approach to risk insurance.

Life stage is defined as "a distinguishable timeframe in an individual’s life characterized by unique and relatively stable behavioral and/or physiological characteristics that are associated with development and growth.” ~ Firestone, et al., 2007

Different strokes…

At their simplest, life stages are used by advisors in the life insurance industry to identify an individual’s potential insurance requirements based on their current stage in life. For example, the risk profile of a young singleton with low levels of financial liability would be different to that of a client with a growing family and significant financial liabilities, who in turn has different needs to a person whose children have left home and is on the verge of retiring.

While life stages provide a good base upon which to build a risk profile, financial advisors must be aware that this "method” is less than ideal when performing a comprehensive financial needs analysis. It is therefore necessary for the financial advisor to assist the client in finding solutions that meet their unique circumstances, regardless of life stage.

Adding lifestyle to life stage

An experienced financial advisor will consider a client’s lifestyle in additional to his / her life stage. This means considering individual objectives, financial situations, occupations, hobbies, family histories and healthcare requirements and then addressing these needs with appropriate solutions.

Using life stage as the primary or singular driver of a risk assessment can lead to boxed and pre-packaged risk products rather than solutions tailored to the unique circumstances and needs of your client. These generic risk products also diminish the role of the financial advisor in the financial planning process. A consequence of "off the shelf” risk solutions is that consumers believe they can – and should – navigate the complex world of insurance despite limited knowledge of how to match their needs with the products available.

Best policy – review everything

Regardless of what life stage your clients find themselves in it makes sense to review all insurance policies, and increase or decrease the covers in line with the clients’ changing circumstances. Significant events in an individual’s life would require a consultation with their financial advisor to ensure that their financial and insurance portfolios remain relevant in light of their revised circumstances.

Such changes include a new addition to the family, retirement, a new mortgage bond or a sale or acquisition of an asset. While a client may be young and relatively liability free, their risk factors and family history could point to them developing diabetes or heart disease at an earlier age, which would have implications for their critical illness cover.

Unexpected situations

A 60-year old man may marry a younger wife and have young children to take care of, which means his financial liabilities are very different to those of his peer group, whose children have typically moved out of the home.

Altrisk’s claims statistics clearly demonstrate the unpredictability of life. People are contracting critical illnesses such as cancer and heart disease at younger ages and more frequently than before. Disability is no longer the preserve of the 55 to 65 year olds, but a worrying reality for both younger and older age groups.

Custom-made cover

Financial advisers must make sure that their clients’ insurance covers match their personal circumstances. The range of risks that your clients may be exposed to are often complex. In most instances getting them to understand the consequences of these risks is challenging. Your best defence is to highlight the complex interdependencies that may not be immediately apparent from a life stage approach.

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