Following recent articles that have focused on addressing some of the challenges presented by the soon-to-commence Life Insurance Framework reforms, WA adviser, Mark Rando, turns his attention to an issue that has existed for many decades – that of underinsurance in Australia…
I was talking insurance with a friend outside of the industry recently. She’d read an article about Australia’s issue with underinsurance. ‘Is there a country that does it well?’ My answer of course was ‘no’, telling her that people around the world, now more than ever, are prepared to run the gauntlet of risk where their financial security is concerned.
Debt is high, cash flow is low and the majority of clients are prepared to adopt a ‘she’ll be right’ mentality.
As advisers, we’re bound by a best interest duty. We’re required to provide quality advice – but in doing so, we risk pricing ourselves out of insurance.
The needs analysis in the Statement of Advice process (SoA) clearly guides us on the insurance a particular client requires. More often than not, we’re finding that people opt for lesser amounts or do not go ahead with insurance at all.
As an adviser and someone who talks quite a bit on the importance of ethics in the industry, I’m feeling that the time has come to seriously question whether the system is broken and whether we, as advisers, are a cog in the wheel that’s contributing to system failure.
If we are part of the problem, then we have to ask, where to from here?
How to fix a broken system of underinsurance
Tax deductibility of financial advice
To begin, I would like to see a white paper in Parliament exploring the economic benefits of tax incentives that encourage people to seek our professional services, as they would any other.
I maintain that clients should be able to claim the cost of our fees beyond those services that relate to assessable income (income protection insurance and investment advice for example) and incorporate the full suite of services an adviser provides.
It makes economic sense to have individuals and families adequately insured so that, should the worst happen, people are able to continue to contribute to the economy and not burden the welfare system, which is a ‘safety net’ that is unlikely to be sufficient for people with high personal debt.
Secondly, insurance needs to be more affordable. I understand that insurance companies have profit margins like the rest of us, but how are we ever going to discharge our best interest duty if people baulk at the cost before considering any other information?
If the client believes their adviser is doing the best for them then the adviser is recommending what the client needs. Unfortunately, advisers can’t alter the price of the products and services they recommend.
Linking life insurance and mortgages
Finally: I have not had a single client in the last 12 years ask me what they can afford when it comes to buying a house. Every single time, the client already has a mortgage and they have usually borrowed the maximum amount. To make matters worse, no accommodation has been made by the lender for taking out an insurance policy to cover repayments should the borrower face a ‘worst case scenario’.
If advisers were part of the process and not an afterthought after debt has already been committed to, the risk to the individual and the economy can be minimised.
I would also note the importance of an adviser in talking a client through other risks relating to mortgages. The age-old guarantor issue is an example. Should an adult child pass away and the home that their parents guarantored is now worth less than what the child paid for it, the parents could find themselves carrying a hefty debt into retirement.
[Editor’s note: We encourage you to add your own suggestions as to what you perceive to be the key strategies that will lead to addressing Australia’s underinsurance dilemma…]
Mark Rando is the Senior Adviser and Managing Director of Rando and Associates (www.rando.com.au) based in Bunbury WA. He is a finalist of the AFA Adviser of the Year 2011, 2012 and 2013, a finalist in the 2016 Telstra Business Awards and is a former State Chair of the MDRT. He was recognised at the 2017 M3 National Conference, where he won a practice award for Outstanding Performance. Mark currently mentors other advisers in Australia and overseas.