Archive for Cost

What’s the difference between buying Funeral Insurance or a Pre-paid Funeral Plan?

Posted by Steven

Funeral insurance or “final expenses” insurance is a life insurance policy with a small cover amount, such as $5,000 to $25,000, that you may buy directly from and Insurer like Pinnacle Life. You can name any beneficiary, typically a family member, who would make the claim and receive the money upon your death. That beneficiary would then be responsible for using the money to carry out your wishes.

The beneficiary legally could decide to use the money any way they want, so make sure you trust your beneficiary. Also, if your cover amount exceeds the cost of your funeral, the beneficiary keeps the difference.

Another type of life funeral insurance is called pre-paid insurance. It is intended for the person who has selected specific arrangements at a funeral home and wants the assurance that those arrangements will be paid for and implemented.

Unlike funeral insurance policies, which you buy directly from an insurance company, pre-paid policies are sold by funeral home directors. The funeral home is the beneficiary of the policy and the funeral director receives a commission, for selling you the policy. The Funeral Directors Association of NZ website has some good information about pre-paid funeral plans. http://www.fdanz.org.nz/pre-paid-funerals.aspx

Unfortunately, unlike funeral insurance, there are no websites which allows one to comparison shop for pre-paid funerals, so you’ll have to phone around to compare prices and policy terms.

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Many people have no life insurance – maybe now we know why…

Posted by Ed

Why are articles about buying life insurance typically bad news?

Take for example this article by Diana Clement a few weeks ago in the NZ Herald, which highlighted;

  • 45% of Kiwi families have no (that’s ‘N’…‘O’) life insurance cover at all.
  • Just 0.9% of Kiwi household expenditure in 2010 went on life insurance… down from 1.1% in 1995!

All we (in the life insurance industry) want to know is… why?

Why can’t we get people to whip out their credit cards and fight each other over the best deals on life insurance – just like they do at the Apple store? I mean, what’s the matter with people that prefer to buy wonderful new gadgets and gismos ahead of life insurance to keep their loved ones afloat if they were to die suddenly (did you catch those violins??).

And then a couple of days ago I came upon this article and wondered if it miraculously offers us the elusive reason why people avoid buying life insurance.

The article is entitled “Cost Perception May Deter Life Insurance Sales”; and that pretty well sums up the contents. What was interesting is that this article is not based on ‘opinion’, it’s based on market research carried out by LIMRA.

Survey respondents in the US were asked to estimate the annual cost of a $250,000 life policy for a healthy 30-year old. Whilst respondents on average estimated the cost would be around $34/month, the actual cost was in fact closer to $12/month.

So, on average, people who have no insurance assume the cost of life insurance is almost 3 times greater than it actually is.

Imagine if you thought the average Apple computer was around $7000.00.

Would you still be that keen to fight your way into an Apple store to play with the toys?

Hmmm.

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Self interest drives life insurance premiums up!

Posted by Steven

Churn continues to pester the life insurance industry.  Insurance churning is the practice of cancelling an existing life insurance policy placed for a client with one Insurer and re-writing that some policy with another Insurer in order to generate a new commission from the account for the broker. Unfortunately due to high upfront commissions paid for life insurance products in New Zealand, churning is almost, dare I say it, incentivised.

This commission paid upfront to the broker is generally about 200% of the first year’s premium, with a provision that should the policy fall over (lapse) within the first 24 months, the Insurer will have the right to claw back a proportion of the commissions paid. However once the policy has been in force for 2 years, if the insurance policy is then cancelled, the Insurance company will have no recourse on the commissions paid.

A motivated broker can possibly find a myriad of reasons why the policy should be moved; but the easy sell rests with;

  • A new clause in another Insurer’s policy makes it more attractive, or better suited for purpose
  • Price changes have rendered the existing policy uncompetitive in today’s market

The broker will tell you hand on heart, they moved the business to another insurer in their clients best interests “I saved him some money” or “that policy did not cover disease XYZ”. While these reasons may be valid in some cases, in most instances the motive to change is the lure of a new commission.

Most people are in business to maximise revenue. Brokers are no different. If a broker can move their client’s business say every 4 years, they stand to earn commissions multiple times on that same client. On the flip side, Insurers are continually paying commission to get that client onto their books (albeit temporarily).

The exacerbation of the problem is highlighted in the emergence of Partners Life. A new Insurance brand with substantial new business growth in a very short time. Not because Partners Life has embarked on a strong marketing campaign, (few members of the NZ public would even know who they are), but because they have embarked on getting the independent brokers on their side. How do they do that?

  1. Pay top dollar commissions for new business
  2. Design their premium structure in such a way that 55 to 65 year olds pay a little less than the market average. In this way brokers can move the business sighting the savings they provide their client

Interestingly, few brokers churn their policy to Pinnacle Life, who do have the lowest price across all age groups. Why? Well they don’t pay anything like the commissions available from other NZ insurers. Which makes you wonder about the broker’s justification? It’s more about self-interest than client-interest. And we all know who pays the price for churn in the end.

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Premiums to match your DNA?

Posted by Steven

An insurance joker once professed, “Insurance employees don’t need titles on their business cards; white shirts actuarial, blue shirts marketing, black shirts underwriting”. Underwriters are viewed as the morgue of an insurance company, “the policy prevention department” as my business partner once put it. Assessing individual mortality is part science and part luck. But the advances made in genome sequence are going tip the scales greatly towards the world of science.

The X Prize Foundation is offering US$10M to the first team to sequence the genomes of 100 centenarians.  In layman’s terms “find the genetic code for those that live beyond 100 years”.  The competition starts Jan 2013, and the sequencing has to take place in 30 days.  The competition aim is two-fold. First, find a way in which genomes can be sequenced accurately in a relative short period of time, second, determine what genetic pool is consistent with longevity. No easy task apparently (read the article in the economist for more info).

Back to the black shirt underwriters. The ability to sequence genomes quickly will make the cost of getting a report on an individual’s DNA make-up much more affordable. A hair sample will give an underwriter an accurate description of the likelihood of all or any serious alignments that may linger, and a much better view of longevity. No more blood or urine tests; simply send a hair sample and with-in minutes the underwriter will have a health assessment waiting on their PC with the aid of some ingenious piece of software. The push to economise genome sequencing is going to revolutionise the underwriting world, and my pick is it is going to happen a lot quicker than underwriters are prepared for.  Resistance to change will fall by the wayside when their masters learn of the cost savings to be made, and the improved outcomes these new techniques will deliver, particularly when underwriting for critical Illness and disability products.

The tag-line of the future?……  Life insurance premiums as unique as your DNA

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Broker breaks the mould

Posted by admin

I read with interest an article by Des Morgan in ScoopIt, “Start-Up Online Life Insurance Firm Breaks The Commission Mold”.

Farmers seeking to protect their revenue in the event of illness and provide the funds required for estate succession planning now have a more affordable option with the launch of a new online website insurance provider.

Online website insurer Insurance4me.co.nz helps farm owners protect their key farm workers so they have the funds readily available to replace their farm worker in the event of illness or death and keep the farm ticking over.

Director Des Morgan says insurance is essential for farmers whereby funds may be required to assist with children who eventually want to take over the family farm, or to buy out siblings who elect not to be actively involved in the family business.

“Traditional forms of insurance for farmers have worked well in the past but now the advent of the internet can offer farmers discounts which save thousands of dollars in premiums by slashing commission fees by 50 per cent,” Morgan says..

“Many people don’t realise it but if you have signed up to pay three hundred a month in life insurance, then the broker has just walked away with a sizable, five to seven thousand dollars in commission,” he says.

That’s an average commission of 150-200 per cent on a client’s first-year premium. Morgan says the internet can provides a significant saving for its clients by having them complete their own needs analysis.

Insurance4me is “no-advice” insurance provider which surveys all the major insurance companies, seeking the lowest premiums for farmers. “No agent calls with our service, but consumers can complete their own needs analysis via independent sites”. These include www.sorted.co.nz and www.consumer.org.nz/reports/life-insurance/calculator.

“Instead, the onus is on the client to complete their own needs analysis and identify the amount of life insurance which meets their own circumstances. In return we discount the commissions by a minimum fifty per cent,” Morgan says.

With the Investment Savings and Insurance Association (ISI) saying that many New Zealanders are still inadequately insured and continue to risk their financial security by failing to protect their greatest asset – themselves, Morgan believes bringing down the cost of insurance for consumers will go a long way to resolve this problem.

“After you take away the typical household mortgage, insurance is one of the biggest drains on a family and an individual’s income. But by using this website, they can now take advantage of some real savings,” he says.

“This means the savings made on insurance premiums can be spent on retirement plans like KiwiSaver, reducing debt, paying off the mortgage or investing in your child’s education,” Morgan says.

Morgan has a vast amount of experience in the industry, including eight years as NZ broker manager at Colonial Mutual Life and as a director of financial planning firm Endeavour Financial Services Ltd, which already has more than 1500 clients.

Morgan sees the introduction of an online business to his existing firm as an opportunity for clients to use a less personalised, low cost DIY service.

In an economic climate which is still uncertain, Insurance4me gives consumers the tools to take control of their life insurance, says Morgan.

Morgan uses Pinnacle Life as the first port of call for life insurance quotes, simply because they offer the cheapest term life insurance rates on the market. However he has agencies with all the major insurers.

If the client has a preference for other insurers such as AMP, AXA, Asteron, Sovereign, Tower, One Path (ex ING) and Fidelity Life, Insurance4me reduces its commission by 50 per cent to provide the 10 per cent discount on the life of the premium.

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Why life insurance companies don’t go broke…

Posted by Ed

Insightful question received from a reader…

Q

I would love to buy life insurance but I have one concern. If insurers cover you until you are 100 years old, there’s a 100% chance the insurance company will have to pay you the amount you are covered for.

I have put together a spreadsheet with a $30/month payment and interest at 8% pa. I could not save even $250,000 in 50 years, whereas if I die, the insurance company would have to pay out $420,000 – the amount I covered myself for.

What am I missing here?  How come the insurance companies don’t go broke?

Thanks, Roxanne.

A

Thanks for this Roxanne.

There are a few things that you haven’t factored into your spreadsheet.

Firstly, a life insurance policy that covers you until you are 100 years old would have a monthly premium that increases each year.  This annual price increase takes into account the fact that your risk of dying increases each year, as you age. In the first year you may be paying $30/month but after say 20 years you would be paying something like $200/month. So you’ll need to factor this annual increase into your spreadsheet numbers.

Secondly, a large proportion of people taking out life insurance cancel their policy long before they die.  Life insurance is like car insurance in some ways… you only need car insurance while you have a car. Once you sell your car, you can stop paying the insurance and cancel your policy.

Most people don’t continue with their policy past age 75. Besides the fact that it gets very expensive, the purpose of life insurance is to financially protect those people that are dependent on you. By the time you are 60 or 70, most people don’t have financial dependants – their children generally have their own income. So they no longer need the insurance and they stop paying.

That’s insurance for you… collecting premiums from the many, only to end up paying the few.

Great business:-)

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Want lower life insurance premiums? Then don’t stay home!

Posted by Ed

When I saw the statistic that 632,920 New Zealanders were injured in their homes last year I thought there must be some mistake… maybe an extra zero. But nope, the number is correct.

With a total population of only 4.4mil people in New Zealand, this means around 1 in 7 people are injured at home each year. That’s like 5 to 10 people in every street in New Zealand ended up in a doctor’s waiting room or a hospital because of a home accident.

However, if we drill a little deeper into these numbers we notice that 621 people died in home accidents last year…  more than the total number of people killed in road accidents and workplace accidents combined!!

So what does this mean for life insurance?

Well… typically, if you engage in dangerous pastimes such as abseiling, rock climbing, sky diving or hunting, or if you are employed in a dangerous occupation such as working on an oil rig, you’ll be charged a higher price for your life insurance.

It sounds like we should be adding one more dangerous occupation/pastime to the list… staying at home!

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What’s up with single parents and life insurance??

Posted by Ed

A survey released in the US found that 69% of single parents with children still living at home are uninsured… confirming that children of single parent homes are at greater risk of enduring financial hardship if their sole provider were to pass away.

Whilst this was a US-based survey and not a Kiwi survey, we suspect that a similar study in NZ would turn up similar results. This would be consistent with many studies that have been carried out around the world highlighting the problem of people being under-insured.

Specific results of the survey were these…

  • 79% of single men and 66% of single women with dependent children, and who earn less than $50,000 per year, have no life insurance
  • 79% of single men and 56% of single women with dependent children, and who earn between $50,000-250,000 per year, are uninsured.

The survey suggests that single fathers with dependent children are more uninsured than single mothers. It also suggests that the level of under-insurance for single parents is not radically affected by level of income.

So why is this? Is it because single parents don’t worry about the financial consequences of dying?  Umm, probably not.

Maybe it has something to do with single parents being very pushed for time and simply not getting around to it, or maybe a single income family is more likely to be financially stretched.

Thankfully ‘online’ life insurance has changed all this. Buying online takes as little as 10 minutes and you’ll typically pay around 20% less!

So… if you’re

  • a working single parent
  • without life insurance
  • and your children are financially dependent on you

just click here!

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Busting myths…

Posted by Steven

We copped some flack this week for standing up for policyholders whose premiums are about to be increased by some life insurance companies. The flack from some professionals in the industry was a little unfair, we thought, with some comments bordering on what we would regard as ‘myths’. I’d like to bust a few of them…

Myth 1

Pinnacle Life sources it’s new business by somehow ‘piggy-backing’ off the hard work of other insurers…

Busted! Pinnacle Life spends significantly on radio/TV advertising and employs its own underwriters and administration staff… fair to say that Pinnacle Life pays its own way for its new business.

Myth 2

Consumers that buy insurance from Pinnacle Life don’t understand what they’re buying…

Busted! It’s patronising to suggest consumers are illiterate and can’t understand a straightforward policy document, particularly when Pinnacle Life won the NZ WriteMark plain English Award in 2009 for its clear and understandable policy wording. We think consumers are smarter than that.

Myth 3

An adviser that switches a policy to Pinnacle Life to achieve a 20% saving for a client, while earning a 75% commission is “shameless”…

Busted!  If that adviser is shameless, what do you call an adviser that switches a policy to achieve a 5% saving for a client and then pockets a 220% commission?

Myth 4

Pinnacle Life’s only point of difference is price…

Busted! Besides offering the most competitive prices in NZ, life insurance policies from Pinnacle Life are jargon-free, straightforward and relevant… and can be purchased online in less than 10 minutes…

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Life Insurance premium increases… who’s standing up for existing customers?

Posted by Ed

There’s a lot going on in the life insurance industry around price increases, brought on by a change in tax legislation. Pinnacle Life made several comments (see Good Returns and Stuff) about insurers unjustifiably raising premiums for their existing policyholders and we’ll stand by that.

The nub of the issue is that we have new tax legislation in NZ specifically for life insurance companies, as mentioned in a previous post. The new legislation effectively increases company tax on life insurance policies sold after 1 July 2010.

But what about policyholders that already have a life insurance policy today? Is there an increase in company tax for these policies?

The simple answer is “no”.  The new tax legislation protects existing policyholders by effectively waiving increased tax on these policies for a period of 5 years. For what it’s worth, the concept has been termed ‘grandfathering’.

So why are some insurers increasing premiums for their existing life insurance customers? After all, there’s no added cost related to these policies so we’ve questioned the logic.

And who’s standing up for these existing customers?

We also wonder what the IRD will make of all this given their extraordinary effort to avoid this happening.

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