Keeping clients at the centre of life insurance

Whether you are the adviser replacing a life insurance policy, or the one who recommended it in the first place, you should be fine as long as it's only ever about the client, argues Sue Laing.

There are two discrete situations to look at across the issue of replacement of life insurance policies.

Both situations are currently the subject of hot discussion in topical blogs or forum posts relating to the churn/clawback remedy proposal, originated recently by the Financial Services Council.

Firstly: what advisers should and could do when they are the "replacing adviser"; and secondly what current advisers on existing policies should and could do to minimise the risk of another adviser replacing those policies inappropriately. Any adviser can be in both of these positions at any time.

The uncomfortable truth

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As an important aside, let's remember that for every policy that is justifiably replaced, because it was not matched appropriately to client need in terms of structure and features (and this can cover a broad range of misdirected reasons for product choice), there isn't just the new adviser, who is doing the right thing in these cases by replacing the existing policy.

There is, uncomfortably, also an adviser at the original end who identifiably failed the client. That's not good for any of us - and you have to wonder how that got through their audit processes.

If that client hadn't had the chance to have their situation redeemed, who knows what the shortfall in claim outcomes might have been?

And let's also remember that for every policy that is at the outset well matched and appropriately selected, the risk of inappropriate replacement is ever present - the next barbecue the client attends could be the end of your sound advice, unless you manage the client's education and their expectations very well.

A final tip on this - make sure you know exactly what each insurer's process is to advise incumbent advisers when they receive a client's cancellation request.

How do you approach these situations?

There are three ways that an adviser can be involved in a replacement policy situation:

1. You are the new adviser and you replace a policy (let's assume the singular for ease of giving examples) and so unseat the originating adviser; or
2. You are the originating adviser and you choose to move your own client to another policy; or
3. You are the originating adviser and you find a policy taken out from under your nose.

Taking these in order: in scenarios 1 and 2 - what prompts you to consider replacing policies? There definitely remains out there an adviser ethos that it's your job to always get the best deal - for deal read cost - for your client.

The posts on industry forums ring loud with this belief.

Historically this reflects an embedded attitude that often arises from an ex-general insurance background and it seems to have survived.

If you are one of these, you position yourself somewhat as a hero who will always look after the client's pocket (after all that's the client's priority, right?) and often this will be top of your value proposition.

Ask yourself, though: what happens when you simply can't keep replacing what your client has without seriously eroding their protection?

That can happen either because the client becomes uninsurable for new policies or sums insured, or because you can't get any cheaper than you've gone already for the same benefits. So do you sell fewer benefits - at your and the client's risk?

If instead your main reason for replacement is product quality and this is your value proposition, you too could be a disappearing breed.

The need for charging fees for advice - not transactions - as well as the commoditisation of product both continue unabated and are barriers to constantly striving for the 'best' product.

Dangerous door-openers to replacement

Client loss by stealth is scenario 3: among the myriad reasons for replacement (away from you as incumbent adviser) are two stand-out door-openers for an unwise-at-best, misleading-at-worst, recommendation to replace by another adviser:

Level premiums are more expensive in every case at outset and until they reach that crossover point where they become steadily more advantageous over stepped premiums.

This early, 'funding' period has been the bane of many an adviser as it gives others a leg-up to replace with stepped premiums. No matter that selling the long-term strategic value has been a coup by the originating adviser. 

 Agreed value income protection, particularly endorsed or guaranteed agreed value which involves a lot of up-front work on financial evidence by the originating adviser, is another policy structure that leaves a door open for another adviser to ride in on the premium savings bandwagon, using an indemnity policy by comparison.

Unfortunately this is one that, unlike the level premium situation, can have a disastrous effect at claim time.

How do you, as the originating adviser, avert these outcomes?

Add a reminder to your review agenda as to how level premiums and agreed value work, and caution against poor advice from elsewhere.

If you don't manage this and your role as long-term adviser, then the client risks making a poor decision on current cost alone

Non-compliance is a certainty

How do these situations happen if the replacement policy advice is given correctly and compliantly?

They shouldn't. So the replacement policy advice from the replacing adviser is surely either omitted from the statement of advice (SOA) altogether or poorly compiled - an overt compliance breach of major proportions - or the adviser chose not to explain that section in the SOA - an under-the-radar compliance breach in its own right.

Sue Laing is the co-founder of The Risk Store.