There is little doubt that, when viewed from several perspectives, life insurance is a common and logical entry point to the world of advice.
Most conceptual models of financial planning have protection, or life insurance, as one of the foundational elements – to be put in place before more advanced goals are tackled. This is intuitively sensible, as the ability to earn an income is central to the ability to build wealth. Conversely, the interruption of one’s ability to earn an income can bring even the best-laid wealth accumulation plans unstuck.
A scientific articulation of this relationship is shown in Figure 2 below, which uses the term ‘Human Capital’ to describe the future income generating capability of an individual over time. In retirement, financial capital is drawn down to fund core (everyday living) expenses, healthcare, and discretionary (travel, entertainment etc) expenditures.
Taking this perspective, life insurance is a mechanism to replace the loss of Human Capital which occurs in the event of death, disablement, or critical illness.A practical – and stark – example of the implications of a loss of human capital can be found in research8 which showed that around 20% of all mortgage foreclosures in Australia were due to a member of the household suffering an illness or accident. A simpler and more frequently used device to articulate the role of life insurance in financial planning is the pyramid, of which Figure 3 is a typical example. This is akin to Maslow’s hierarchy of needs, reflecting the base level needs that need to be satisfied to support achievement of goals – ‘actualisation’ further up the pyramid.
One of the points to note here is that cash flow and life insurance are generally regarded as the ‘base needs’ to address, and in the context of life insurance advice, there is an important nexus between these two issues that we will explore later in this paper.
Canberra Adviser Iain Jeffery has grown his holistic practice to the point where he is now able to specialise in risk, and for him, having appropriate life insurance in place is a non-negotiable if they are to work with that client on a more holistic basis.
“We don’t deal with people who aren’t appropriately insured. We say to them, look, we’re not going to take you on as a financial planning client for the simple fact that we can spend 10, 15 years of our time building something for you, and it can be broken in a heartbeat because of something out of our control. Having zero cover and working to build assets is just a pointless exercise for us.” Iain Jeffery.
“Life insurance is just one mechanism available to mitigate risk. Many clients have a fixed budget for insurance and so part of the advice process is to work with them on the best way to allocate that budget to the different cover types. You need to explore issues like sick leave, credit cards, whether they have nearby family and so on. Understanding that level of detail helps you adjust levers like benefit and waiting periods which can have a massive impact on premium. Coming up with the optimal risk management strategy does require some creative and strategic thinking.” Anita Muecke
The introduction of the FASEA code of ethics in 2019 created an increased responsibility to explore the totality of a client’s situation.
FPA’s Guidance on the Code suggests that acting with integrity, and in the best interests of a client, means “you will need to work out – and, if necessary, help the client to work out – what the client’s objectives, financial situation, needs, interests (including long-term interests), current circumstances and likely future circumstances are. To comply with the ethical duty, it will not be enough for you to limit your inquiries to the information provided by the client; you will need to inquire more widely into the client’s circumstances”9.
Their guidance further recommends not only understanding the client’s current insurance arrangements, but also any future trigger events such as health care and aged care needs, and the financial needs of any dependents.
Notwithstanding debates about whether this makes limited scope advice more challenging, there seems little doubt that an outcome of the Code’s introduction is increased adviser awareness of their client’s life insurance situation (regardless of whether they intend to provide advice in this area).
There are a number of factors that make life insurance a common, and logical, entry point to the world of financial advice.
Firstly, the triggers which drive demand for life insurance are often chronological, and occur earlier in life, giving advisers an opportunity to engage clients earlier in the financial lifestage and creating the potential for a longer, and more mutually profitable, relationship.
Secondly, many of the major hurdles to consumers seeking advice, discussed earlier in this paper, either don’t apply or are less significant in the context of life insurance.
The affordability hurdle becomes less relevant when clients can choose to pay for their advice via commissions.
The belief that they don’t have enough assets to warrant advice becomes less relevant, as does the lack of clarity over the role and value of the financial adviser (it is largely clear what value the adviser will provide in these circumstances).