Opening a can of worms
Unless you’re in the financial services industry I am sure you don’t know – and probably don’t care – about the various ‘types’ of life assurance providers – and until recently the classifications have been pretty loose even at regulatory level. One of the classes of life insurers are the ‘low or no’ advice providers – mostly the direct environment. In the short term arena, these direct insurers have made massive inroads into the market, now commanding over 25% of the market, growing all the time. With all due respect to my friends in the short term industry, it is commodities that are being insured. There is very little room for subjectivity – you draw up an asset list, get it valued and away you go. Having aced that, these insurers have now moved aggressively into the life industry – after all life, disability and dread disease cover is just another commodity, right?
The looming Retail Distribution Review (RDR – you can read more HERE) is going to make these ‘subtle’ distinctions much more important. To put it bluntly, 90% of the population is not going to be able to afford to engage the services of a Financial Advisor or Financial Planner and pay the fees for advice that was previously perceived to be ‘free’. I was curious to find out just what sort of advice was being given by direct insurers, and the price and quality of their product, so did a bit of research. The provider shall remain nameless for obvious reasons.
The reason the distinction of ‘low or no advice’ centres on the definition of ‘advice’. The lower threshold is ‘intermediation’ (aka broking or order taking needing fewer qualifications). Although this distinction between intermediation and advice is in the FAIS act, when it comes to this sort of ‘provider’ it is a bit of a grey area – and the RDR will address some of that. They proudly state that they have ‘fully qualified financial advisors’. Are they just ‘order taking’ or are they making recommendations?
In order to give advice, one has to determine the ‘need’ and recommend the appropriate cover. In my experience this didn’t happen, I was just asked what I wanted and given a quote for it – and when I didn’t like premium the rest of the conversation was around bringing down the price. One of the major differentiators between the direct process and (for want of a better word) the usual process is the vast array of questions around my health (and zero around my needs or objectives – go figure). In the ‘normal’ industry a quote is usually given ‘clean’ assuming what they call ‘standard rates’. In other words, no loading exclusions or refusals on the basis of health, occupation or lifestyle. This is obviously a short-cut and understandable. If you don’t want to waste time developing rapport with a client, and managing their expectations around the ‘standard rate’ then that is the way to go. Most advisors will uncover potential medical problems during the course of the first meeting and warn a client of the potential problems down the line.
Having already done a couple of comparative quotes with traditional insurers I knew the right ‘ballpark’ premium. The first verbal quote I got was more than double.
“How does that sound?” was the question I got. (Fishing expedition. Start high and work the way down).
“Sounds a bit high” was my answer.
“No problem” to the sound of a clicking keyboard, let’s halve it then (removing the “all-your-premiums-back-con”). Just a quick one on that ‘con’. Do the maths, like I did. If you took those extra premiums, invested them in a moderate portfolio not only would you get more than what they offer you BUT you can’t lose it if you claim or stop paying the life cover.
“Is that better?”
“No, still too high”
“Oh but we will give you R100 000 “free funeral cover” within 48 hours, and “free dread disease cover” was the cheerful response. ( It’s not ‘free’, it is an ‘advance’ and most providers do it anyway) The Rx ‘free’ dread disease cover- it is actually another ‘advance’ on the life cover you’re already paying, paying out for if you’re terminally ill and not expected to live more than a year. Other providers also do this, it is not unique but it is not dread disease cover.)
“Sorry, still too high. I have comparative ‘apples for apples’ quotes and you are still too high.” (Surprised that they were uncompetitive? I mean after all, those nasty middlemen in the insurance industry with their outrageously high commissions. Remember the ads? Sleazy salesmen in dirty raincoats loading your premium with commission – so their premiums should be way lower- right? You wish. I have done several comparative quotes for my clients over the years, on average direct insurers are 10-30% more expensive – with 100% commission added. It’s not rocket science, that massive marketing and advertising budget has to be paid somehow.)
“Oh, the problem is those insurers have given you an increasing premium. I can do that too and drop the premium by 20%, Look it’s now Rx!” Was the response I got to that. Really! He must be a mind reader because he hasn’t seen any other quote. No other explanation. For those of you that haven’t already gathered he had now changed to an ‘age rated’ premium – a nasty sleight of hand used by the worst of the brokers to suck in a client with a lower premium that escalates so much in the future it becomes unaffordable. You can read more about premium patterns HERE.
“No, I told you it was apples for apples. I am not that stupid.” (Yes, I was getting a bit testy over the obfuscation (aka BS).
Silence. (What! No, ‘Sorry madam, but you must do what is in your best interests’ or ‘Sorry, I just assumed because we are always the cheapest’ no ‘Thank-you for considering us’). He had put the phone down.
Let’s have a look at some of the other bits in the small print. “We have highly trained insurance advisors” – actually “highly trained order takers” is probably more accurate. There seems to be a bunch of other small print missing that is standard in other quotes like suicide, illegal activity, war and riot exclusions. It’ll probably be in the contract document. Remember there is always a 30 day cooling off period. Most (but not all) traditional providers disclose this sort of thing upfront.
The transition to paying fees for advice rather than it being hidden in commission is not necessarily going to increase the premiums – but it won’t bring them down either. Just like direct insurers ‘don’t pay commission’ but pad the premiums to pay for their marketing costs, Financial advisors will not get commission (or less commission) but will make up the difference by giving you advice. The choice is yours. Commission is paid as a % of the premium, advice fees are likely to be static. Fee only practices, with Certified Financial Planners(R) charge R15k-R30k per plan. Providers are likely to be assisting clients by using their debit order process to help you ‘pay-off’ the advice fee if you can’t come up with the lump sum, but if the premium is small then even splitting up the fee into monthly amounts will make the premium ‘uncompetitive’ compared to the direct insurer. This is why much of the population is going to use the direct insurance route. Overcoming the mindset that advice should be ‘free’ is going to need more than legislation.
My conclusion? Heaven help the 90% that are going to have to go the direct route.
Action: Life cover isn’t as simple as you might think. You die, you get paid – right? There are dozens of variables, and you may not understand all the implications. Some of the terms you need to research : Premium pattern, Age rated, Accelerated benefits, Accidental cover.
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Author Dawn Ridler