Obtaining insurance cover at the optimal cost is a challenge for all advisers. Richard Weatherhead explains.
The price of life insurance cover varies considerably depending on whether cover is purchased through a superannuation fund, via a financial adviser or from a targeted promotion to a customer base.
It also varies depending on whether:
- the business is underwritten, enabling the insurer to decline cover or offer modified terms for those at high risk;
- the product has a pre-existing conditions exclusion;
- cover is provided on the basis of a simplified personal statement; or
- cover is provided under a group arrangement where the only requirement for acceptance is for the sum insured to be below an automatic acceptance limit and for the member to be at work at the time of joining.
The array of different prices available can be quite bewildering. There is a clear role for professional financial advice in obtaining the right level of each type of risk insurance cover at the optimal price for the individual client. There are a number of rating factors used by insurers to determine price. The examples used below are generally taken from the retail risk insurance market where differences in price can be readily calculated. However, where different approaches are taken for products in other market segments, these will be discussed. Graph 1 shows the relationship between prices for men and women, smokers and non-smokers for term insurance and trauma insurance.
The comparisons are based on the average prices for adviser-sold risk insurance products across the Australian market currently. Graph 1 shows that for term insurance, women pay roughly 30 per cent higher premiums for the same level of cover as do men (the red line) from age 35 to 50 and more than 50 per cent higher premiums after age 50. Women smokers pay between 50 per cent and 100 per cent higher premiums than women non-smokers. Male smokers pay between 50 per cent and 130 per cent higher premiums than male non-smokers. The largest difference for both men and women is at age 45. The increasing margin between smokers and non-smokers as age increases reflects the cumulative impact of smoking upon health over the years.
Graph 2 shows the relationship between prices for different pricing factors for income protection business. The examples are based on agreed value cover and show, for 13 different insurers, the impact of those pricing factors. For example, the first set of ratios (on the left-hand-side of the chart) shows that, on average, prices for women are 153 per cent of prices for the equivalent men, assuming a benefit period to age 65. However, there is great diversity between insurers with the ratio ranging from 139 per cent to 180 per cent. The average ratio of smoker to non-smoker prices is around 125 per cent (NOTE: a percentage is not really a ratio) so the differential is not as great as that for death cover.
The two most important factors governing price are the waiting period before benefit commences and the duration of the benefit period itself. If a 14-day waiting period is required, as opposed to a 30-day waiting period, the price can be 75 per cent higher (for a two-year benefit period). However, once again, the range of price differentials across insurers is very broad with the lowest being 147 per cent and the highest being 208 per cent. Income protection cover to age 65 with a two-year waiting period is, on average, half the price of cover with a 30-day waiting period. This is important to note when advising clients who have income protection within their superannuation fund, with benefits for two years, and wishing to supplement it with benefits to age 65, outside superannuation.
In fact, the final column of points in Graph 3 shows that, for a 40-year-old man, income protection with benefits paid to age 65 is, on average, 75 per cent more expensive than income protection with a two-year benefit period and a 30-day waiting period. The cost of income protection for a two-year benefit period relative to the cost with benefits to age 65 varies considerably depending on age. Graph 3 shows this ratio across the age range for each of the 13 selected companies, with the dark blue line being the average price. The comparison is based on stepped premiums and shows a clear downward trend to age 55 before increasing sharply. The declining ratio up to age 55 reflects the increasing incidence of any medical conditions of a long-term nature as age increases; and the steep increase beyond that age reflects the gradual reduction in the potential number of years for which a benefit to age 65 would be paid.
Graph 4 compares prices for different occupations. The product shown is agreed value income protection with a 30-day waiting period and benefits provided to age 65. The baseline price, relative to the others measured, is for a qualified accountant, which is generally in a category of occupations for which the cheapest prices can be provided. As in Graph 2 above, the vertical column of points shows price ratios for each of the 13 insurers and, in this case, the ratios are the price for the selected occupation relative to the price for a qualified accountant. Graph 4 shows that prices can be up to 2.5 times higher for more risky occupations than for less risky occupations.
The diversity of price relativities between insurers is also high. For example, for a livestock auctioneer, prices can be between 160 per cent and 275 per cent of those for a qualified accountant. Graph 4 shows the value of shopping around to find the best insurer for a particular occupation as well as for the client’s other personal characteristics, such as their age, sex and smoker status. Clearly, the graphs shown above can only be taken as a guide of relative price and value for money. Product features vary between insurers and this can be as important for many clients as price itself. Nevertheless, they do demonstrate the benefits of shopping around.
Many superannuation funds offer insurance products with prices averaged across different groups of employees. For example, smokers and non-smokers are often not differentiated. In other cases, particularly where the fund is focused on employees in a particular industry, uniform prices are offered across all occupations. For example, Hesta provides uniform prices across all occupations in the health sector. In these circumstances a client or member of the superannuation fund can obtain particularly cheap or expensive prices depending on their own personal risk characteristics and the pricing philosophy adopted by the fund. This is just another example of how understanding personal risk characteristics and the range of products available in the market can provide real long-term savings for clients.
