Retail insurance indexed cover cutting clients’ wealth

With the cost of financial products under the spotlight, new research shows that retail insurance cover customers could be “seriously damaging” their wealth through inappropriate indexation of premium costs.

Rice Warner’s Retail Insurance Survey, which covered 86 per cent of the in-force retail insurance market, found that the indexed premiums structures on the package of benefits typically suggested by planners often meant their clients lost out.

“The dominating premium structure remains stepped premiums, which generally increase each year through age increments and may also be indexed through inflation,” Rice Warner said. “Often, life companies use a factor of five per cent for indexation even though this is double the underlying CPI increase.”

Graph: Premium projections as a percentage of projected salary

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Source: Rice Warner

Unlike default superannuation members, retail customers would have been through a full advice and underwriting process, meaning they would be expected to be aware of premium costs and their insurance needs.

The question then would become, Rice Warner believed, how customers, being fully aware of the cost at the outset, could control or manage increasing premiums, especially over the medium to long term.

The research house suggested that the retail life product itself could need to be redesigned to have a better shape for how sum assureds change over time.