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Your client takes an extra R2m life cover and adds R2m dread disease cover to their policy at a much higher premium. You’ve filled their insurance gap, but if the higher premium puts the client’s budget under too much pressure, there could be a lapse. Identifying insurance gaps is not enough to ensure client and adviser meet their goals. Integrate affordability into the advice process and the outcome is more certain and favourable, says Kobus Wentzel, Executive Head of Sales and Distribution at 1Life Insurance.
Mind the gap but don’t overlook affordability
The prevalence of underinsurance is high in South Africa, with the life cover gap for an earner with an annual income of +R246 923 at around R2.1m, according to the latest ASISA gap study. Earners in this category typically have around R3.2m life cover versus the need of around R5.3m, although the need for each client will differ according to their circumstances, income and life stage.
One of the reasons for underinsurance is a lack of awareness among clients of how much life cover is enough and how this number changes over time as income, debt and lifestyle change.
Clients often need to be prompted to understand how their insurance needs have changed as their lifestyle changes and they enter new life stages. Advisers play a key role in this process, ensuring cover keeps up with life stage needs during regular reviews and using FNAs to identify insurance gaps. Advisers also need to be aware that filling these gaps can only be successfully achieved when affordability is taken into account.
The battle to accurately assess affordability
Advisers and FNAs can successfully identify insurance gaps, but they have, in the past, fallen short on affordability. A client confronted with the reality of how much cover they need was ready to sign up for a policy. There was little thought for affordability because the pressing need was to take care of loved ones. A few months down the line, the reality of a high premium due each month hit home, and many policies lapse.
There are no winners when lapse rates are high
In South Africa, like most insurance markets, lapses are most common in the first 12 months of a policy being taken out. Stats from the South African Reserve Bank showed that 73% of policies taken out in the 12 months from March 2023 to March 2024 lapsed. That’s a high percentage. ASISA also flagged the high number of lapses for 2023, a significant 8.25 million policies lapsed.
Lapses leave lasting damage. Clients lose cover and premiums that have already been paid, and often the trust they had in the industry is broken. Advisers lose clients, persistency rates drop and they have less access to flexible and favourable commission structures. In the long run, high lapse rates lead to higher premiums to make up for costs lost in issuing new policies that lapse after a few months.
When you integrate affordability and life stage into the advice process and product recommendations, clients are more likely to be adequately covered, more likely to keep paying premiums, and less likely to lapse policies.
How to solve the need-affordability problem
Successfully arriving at a premium amount clients could afford and would pay regularly used to be more art than science as it involved reviewing budgets and slotting in insurance as an expense. Budgets are often based on best case scenarios and include lofty ambitions that are hard to meet when the bank balance is low.
1Plan, 1Life Insurance's one of a kind FNA, adds science to the affordability calculation using algorithms and big data, responsibly and in accordance with data privacy regulations such as POPIA. This allows 1Plan to more accurately determine a premium the client is most likely to continue paying than a traditional FNA. 1Plan also take life stage into account to determine the most appropriate product for each client.
For example, a young single professional may require more disability than life cover, but a 40-year-old may require life and dread disease cover, risks are more prevalent at their age and life stage. 1Plan takes this into account, looking at a client’s unique circumstances and allocating funds available for risk and wealth products to match their current needs.
When clients have policies they need and can afford, the chances are higher that they will keep paying premiums. 1Plan will help achieve this.
The power of 1Plan
1Plan FNA offers life stage planning by optimising client affordability and aligning financial needs.
It ensures you can recommend appropriate risk and investment products, at a price clients can afford and will continue to pay. It is a one of a kind FNA that puts the science into financial advice, allowing advisers to focus on the human connections that are so valuable to their businesses and giving them more time for more advice and more success!