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FA News policy lapses
ASISA raises concern about policy lapses in the industry:
what you as a financial adviser can do to protect your clients
According to the Association for Savings and Investment South Africa’s (ASISA) long-term insurance statistics for the first six months of 2023, 4.3 million risk policies lapsed during that period – which means that 4.3 million policyholders and their beneficiaries now either have reduced cover, or no cover at all. Furthermore, the 2022 ASISA Life and Disability Insurance Gap Study revealed that the average South African income earner had a life insurance shortfall of at least R1 million and a disability cover gap of around R1.4 million at the end of 2021.
While this is clearly a reflection of South Africa’s poor economic situation and the resultant financial strain on consumers, it is vital that you as a financial adviser, educate your clients on the consequences of cancelling or reducing life insurance cover, and help them find ways to ensure long-term affordability.
What value does life insurance provide to policyholders?
As all financial advisers are aware, life insurance is a crucial tool that protects policyholders and their family members from bearing the financial burden in the event of critical illness, disability, or death. Essentially, the cover ensures financial security by providing much-needed funds to cover debt, medical treatment costs, and living expenses.
What are the alternatives if my clients find themselves in a pinch?
First and foremost, there are always consequences to cancelling or reducing life insurance. Our advice would
be to first cut expenses in other areas, such as luxuries or discretionary spending. There are numerous strategies that individuals facing economic pressures can explore to reduce life insurance premiums without compromising cover.
An important first step would be to determine the actual level of cover required and then find a premium pattern that is both sustainable and affordable for the client. Many different premium patterns are available, and with Momentum, clients and advisers can even select different premium patterns per benefit on the same policy, allowing a level of customisation not found elsewhere.
One of the more popular premium patterns is the LifeStage premium pattern, which represents the Myriad house view for long-term cover and provides the best combination of initial affordability, cash flow availability, and long-term sustainability.
Any other options?
Policyholders have several options to consider. For example, one of the simplest solutions is to check if they can benefit from discounts, which are typically offered through loyalty or rewards programmes. If that’s not possible, they also have the option to forego increasing their voluntary cover in a specific year, which can provide some cash-flow relief without having to reduce existing cover.
If none of the aforementioned solutions provide the financial relief required to maintain the cover, financial advisers can review their clients’ cover to determine if the full insured amount is still required. For example, they may no longer have dependants who rely on life insurance, or some of their debts may have been settled or reduced and the full cover amount isn’t required any longer. In such an instance they could consider reducing the growth or the cover amount.
If all else fails and provided that the insured person is still in good health and insurable, they can opt for term insurance that provides coverage for a fixed period, such as 15 years. The premiums on these policies are typically less expensive, as they are priced for shorter terms than the standard whole of life policies.
This approach carries certain risks, but many term policies offer the option to convert to whole of life insurance, which could be considered again when the client’s financial situation stabilises.
In summary, choosing the correct premium pattern and the appropriate level of cover and growth from the outset is the most effective way of ensuring long-term affordability and sustainability.
However, should financial challenges arise due to life’s unexpected events, there are various options to explore for maintaining affordable cover. It is worth noting that it is almost never the best solution to cancel cover as it will make an already difficult financial situation so much worse if an insured event should befall the client and they find themselves without their much needed cover.
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