Col Fullagar outlines the key things to consider when performing a client insurance review.
A core component of the risk insurance advice process is the gathering and analysis of client information so the adviser can identify and recommend insurances that are appropriate for that particular client.
Once in place, the insurance recommended will continue to be appropriate until such time as:
- some relevant aspect of the client’s circumstances materially alters, for example, the client’s level of debt changes, earnings increase, assets appreciate, et cetera;
- a more appropriate insurance product becomes available or is identified; or
- external factors such as legislative changes render previously recommended insurances inappropriate.
In order to improve the chances that material changes are recognised in a timely manner, advisers often arrange to review their client’s circumstances on a regular basis. There is, of course, great wisdom in establishing a regular review practice with clients. This is, however, not the full story.
It may well be that while the client’s circumstances have materially altered, the previously recommended insurances are still appropriate but the changes in the client’s circumstances affect the way in which these insurances operate.
The professional risk insurance adviser needs to:
- be aware that situations such as this can occur;
- be able to identify when they do occur; and
- be able to inform the client of the possible contractual implications.
So what are some of these material changes, how can they be identified and how do they potentially impact on existing insurances? The following represents some examples, however, it is the responsibility of the adviser’s licensee to identify if any others exist and to inform their advisers accordingly.
Change of occupation
A move to a lower risk occupation may mean that a review of the occupation category applying to the total and permanent disability (TPD), income protection or business expense cover can be applied for, leading to a premium reduction.
A move to a higher risk occupation should not affect the premium if the policy has been issued on a non-cancellable basis.
Some TPD contracts, particularly legacy contracts, assess a TPD claim on the client’s occupation at the time of application rather than at the time of claim.
If the client is not made aware of this, a change in occupation may lead to a misunderstanding about the basis of any claim assessment. Also, some contracts require the client to advise the insurer if a change in occupation occurs.
Finally, in regards to TPD, it may be that the new occupation renders the client eligible for benefits that were not previously available, for example, an own occupation TPD definition.
Permanently ceasing work
A change in the working status of the client can potentially affect various insurances. If the client has permanently stopped working, income protection and business expenses policies may contain a provision that allows for the automatic cancellation of the policy.
TPD policies may contain a provision for the definition of TPD to alter to an activities-of-daily living basis.
Reduction in working hours
A reduction in hours worked may affect the definition of TPD that applies at the time of a claim. Rather than an own occupation definition, it may alter to one based on the inability to perform several activities of daily living. A similar situation may occur for legacy income protection policies.
Extended leave
Extended leave may include the taking of maternity, paternity or study leave, or leave without pay.
Income protection and business expenses policies may contain a provision for the definition of disability to alter, for example, to 'any occupation for which the client is reasonably suited by training, education or experience' if the client stops working for longer than 12 months.
Pregnancy
If a client falls pregnant this may well trigger several of the previously mentioned actions, for example, the taking of extended leave.
In addition, knowledge of a client falling pregnant will provide the adviser with an ideal opportunity to inform the client of the insurer’s attitude to exclusions in regards to pregnancy.
Pregnancy may also mean that the client’s occupation definition under their TPD insurance reverts to a 'domestic duties' one. Again, it will be prudent for the adviser to inform the client accordingly.
Living or working overseas
Income protection and business expenses policies may restrict cover or claim payments if the client is living or working outside Australia for an extended period of time.
Change of business ownership
Business expenses policies may have restrictions that are triggered if the client’s business has been sold. The policy may automatically be cancelled although there may be a provision for this not to occur if a new business has commenced.
Going further, if the business ownership has changed, it may be that the level of insured benefits also needs to change and/or insurance may need to be put in place for the new owner or cancelled in regards to the previous owner.
Change of smoking status
For all insurance policies:
- A switch from non-smoker to smoker status should not affect the premium for a non-cancellable policy; and
- A switch from smoker to non-smoker status may open up the opportunity for a premium reduction, subject of course to an appropriate declaration in regards to smoking and, possibly, health.
Policy reinstatement
If a policy has been reinstated during the pre-review period, the client should be informed that cover may not have applied during the period the insurance was in a state of lapse, and time-based exclusions may be re-activated.
Other changes
Change in marital status, birth of a child, taking out or increasing a mortgage, a change in the education status of a dependent, becoming a carer or increased earnings may also open up the opportunity to take out additional insurances under a guaranteed insurability option.
Financial adviser action
If the adviser does not clarify the position in regards to the above changes in the client’s circumstances, it may well be the case that the client’s insurances have been materially affected, opening up a potential action against the adviser if the client is disadvantaged as a result.
While the above process may appear onerous, the implementation of an adviser action plan can be relatively simple.
When undertaking a client review, the adviser should go through a checklist of questions with the client:
- Have you changed occupations?
- Have you stopped working permanently?
If the client responds to all questions in the negative, no further action is required.
If, however, the client responds positively to any of the questions, the adviser simply reviews the client’s insurance policy to see if the action by the client affects the cover in any way or alternatively, and probably preferably, contacts the insurance company and asks it to confirm the position, in writing of course.
Having the insurer confirm the position is preferable for several reasons:
- It, importantly, puts in place a paper trail that can be referred back to if problems arise in the future;
- It avoids the possibility of the adviser making a mistake when reviewing the policy; and
- It is easier to ask.
Once the position has been ascertained, the adviser should inform the client, once again in writing, and, if necessary, make appropriate recommendations with regards to what changes in cover may be required.
Naturally, if the client agrees to implement the recommended changes, the adviser should work with the client to have the changes made.
If the client does not implement the recommended changes, the adviser has the protection of a properly documented paper trail.
As with many things to do with risk insurance, the hard part is identifying the area of adviser exposure. Once this has been done, implementing a safe way forward is often not overly difficult.
As mentioned earlier, there may be other matters that need to be covered off with the client; for example, legislative changes since the previous review may necessitate the client being asked additional questions in a particular year that are not required subsequently.
Matters such as this should be raised and discussed with the adviser’s licensee so that appropriate action can be taken.
Col Fullagar is the national manager at Risk Insurance.
