Time To Re-Think Life Insurance

I’m constantly questioning things and looking for better, more efficient ways to do things.

Lately, I’ve been talking with a number of advisers about the life insurance industry — particularly the products — and the lack of innovation in this area.

When you look at the life insurance industry here in Australia, what significant changes have occurred over the past twenty or thirty years? Sure, there’ve been product tweaks and enhancements, but the underlying products still look much the same as they did in the 1990’s.

Are there better ways to deliver the protection that the customer actually needs?

Here are some ideas to get the ball rolling.

Limited Term Life Insurance

Most term insurance contracts are built with a policy term to age 99. But we all know very few people can afford to pay for these policies in the later periods of their lives. And when you think about why people take out insurance in the first place, it’s to cover against economic loss. Usually by the time they’re in their 60’s the need for cover has reduced due to their increased assets and reduced debts. I know that for some people there’s still a need for cover, but for many, the need has passed.

So why can’t we introduce term life policies that stop at a particular age or run for a fixed term? If the insurers aren’t contractually obligated to cover people into the later years of their life (when more die), couldn’t they offer the cover with a lower premium if they knew this policy would cease when the life insured turned 60 or 65?

There are some illnesses and conditions that get worse later in life so currently, the insurers need to allow for this in their assessments. But if the policy stopped before the danger period, it would reduce the risk to the insurer.

Imagine a couple in their 30’s taking out insurance for a fixed term of 25 years. There’s a whole raft of illnesses and medical conditions that have a small statistical probability of happening prior to age 60. If the insurer had a very low chance of needing to factor in these conditions occurring, wouldn’t that lead to lower premiums?

What about a client that today would have a pre-existing condition that usually gets worse and affects mortality late in life? With the existing policies, they’d probably get an exclusion on the condition, but what if they only wanted the cover to age 55, before the risk increased? Could they instead get standard rates for a policy with a fixed end-date?

Link cover to debt

If a portion of life cover is to repay debt, why not create a policy that’s linked to that debt’s balance? So as the debt reduces, so does the life cover.

Instead of a premium that increases each year, it could decrease as the sum insured declines.

In this age of online information, it would be a simple matter to set up the electronic ‘pipeline’ so the insurer gets an up to date loan balance so it can adjust the level of cover.

And from a marketing/client education point of view, wouldn’t this make it really easy for the client to understand why they’re holding that policy. They can see the direct link between this life policy and their loan so they’re going to be less likely to cancel it.

And add in an option to increase cover or make the policy portable across future loans so if they refinance or move house, the cover moves with them. Even add in the option of future increases without underwriting if they take out a bigger mortgage.

I know some companies offer this cover, but usually, it’s offered by the same company that’s providing the debt and it’s an accidental death only policy. I’m suggesting something where the consumer has the option to select any insurer to link up with their home loan.

Shared Cover

You may be providing insurance for both members of a couple. Maybe some of the insurance need is to cover things like repayment of debt or a lump sum to cover future education expenses. If one of the members of the couple died and the life insurance pays out, then that lump sum need becomes fully funded. So the other (surviving) member of the couple doesn’t need that portion of cover anymore.

So why can’t we create a life insurance product that’s actually linked across the two people, on a first-to-die basis, so that when one dies the policy finishes.

There’d be a lower cost to the life company which leads to lower premiums for the client. I remember back in the late 90’s Lumley Life had a policy like this that operated on a first-to-die basis.

Pick-And-Choose Trauma Cover

What if a client could create their own trauma policy by selecting the conditions they wanted to include? If they only wanted cover across a select range of conditions they could select those and exclude the rest.

Of course, you’d need a system that could cope with this level of customisation and would re-calculate the premium each time the client added or removed a condition at the quotation stage. But that’s not too hard in today’s world.

And there’d be some legalese for the client to read along the way.

At the end of the process, the system could produce a quote and provide a customised PDS for the client that outlines the broader policy and the conditions that they’ve chosen.

Of course, there’s a risk that in the future they contract a medical condition that would have been covered under the policy but they didn’t select. But you’d cover off the liability of this through the original process of selecting the cover and conditions.

Nothing Should Be Too Hard

Pricing insurance is a matter of using actuarial figures and data to assess the risk and come up with an appropriate rate. Now, more than ever, there is a huge amount of data available to insurers to enable them to assess their products, pricing and profitability.

So, in the age of big data and machine learning, why it is so hard to apply that knowledge and deliver products that clients would value because they were based on what the client actually wanted and needed, rather than “the way it’s always been done?” Because that’s the problem with the current system — it’s a bunch of band-aids added on to a life insurance product that doesn’t look much different to the products of 30 years ago.

If the large, established life insurance companies can’t come up with a product range that meets the needs of their clients, then their competition will.

And their competition won’t be other established life insurance companies. It’ll be businesses like Amazon, Google or Facebook who have a history of disrupting traditional businesses.

We accept technological change in so many areas of our lives — does anyone still borrow DVDs any more or do you just stream the movies you want to watch — yet the life insurance industry is still selling the same things it sold twenty years ago.

The technology is there to do all the things I’ve written about in this article. What’s missing is the desire or need to change.

Well, a change is going to come (thanks, Sam Cooke) and the incumbents have a fantastic opportunity to facilitate this by introducing new products that meet the needs of a lot of Australians. Alternatively, they can sit back, look at the reduced profits they’re experiencing across their books, continue to raise premiums as a response and hope for the best.

Your thoughts…

Leave a comment below and let me know what insurance products you’d like to see that would meet the needs of your clients.

Originally published at Contar Media.