Life insurance – Do we really need advice?
There has been lot of media lately with respect to financial advice, including some very disturbing examples of poor behaviour revealed through the Royal Commission. We have now seen the resignation of both the AMP CEO and AMP Chairperson, the latest casualty at the life insurance and financial advice giant.
These stories will be of no surprise to many of us who have followed some of the recent reviews into financial advice, especially those conducted by ASIC.
So what did these reviews reveal, and do we really need financial advice anyway?
ASIC 2018 Review – Financial Advice and Vertical Integration
In January 2018, ASIC released a review of financial advice provided by the five largest (vertically integrated) financial institutions. These included the banks and AMP.
The review found that, overall, around 80% of the financial products on the firms’ approved products lists (APLs) were external products and 20% were internal or ‘in-house’ products. Generally advisers can only advise on and sell products that are on their APL. However, 68% of clients’ funds were invested in these in-house products. Clearly the advice in relation to these products has not been objective.
The current Royal Commission hearing has also revealed several scenarios where clients have been switched by an adviser from their existing external products into ‘in-house’ products, even when there have been no advantages to the clients in doing so. It is likely this switching occurred to provide advantage to the adviser and their firm.
In the 2018 review, ASIC examined a number of client files to test whether advice to switch to in-house products satisfied the ‘best interests’ requirements. They found that in 75% of the advice files reviewed, the advisers did not comply with the duty to act in the “best interests” of their clients.
The findings speak for themselves.
ASIC 2014 Review – Advice and Life insurance
ASIC had previously conducted a review into how life insurance was sold by advisers, between September 2013 and July 2014. This review included the incentives behind product advice, and the quality of the personal advice consumers receive.
ASIC found that while 63% of advice files from Australian Financial Services (AFS) licensees were compliant, more than one third (37%) of the advice consumers received failed to comply with the laws relating to appropriate advice and didn’t prioritise the needs of the client.
The report found that high upfront commissions are strongly correlated with poor advice, including in situations where the recommendation is to switch products. Again, these were very disappointing findings.
Do we need financial advice for Life insurance?
The key findings from the ASIC reviews and the Royal Commission lead to questions as to whether financial advice is required when purchasing Life insurance at all. Can we bypass financial advice altogether?
In short, the answer is “yes”. For those people who want to do it themselves, there are a number of ways to determine what type of cover and particularly, how much cover they need, to protect their personal financial circumstances.
How much Life cover do I need?
1. Rule of thumb
The first question someone should ask themselves when considering how much Life insurance cover they need is:
“How much would my family need to ensure they are not financially disadvantaged upon my death or serious injury?”’
One effective ‘rule of thumb’ method often used to determine a starting point for the level of Life insurance cover required, is to calculate at least 15 to 20 times annual salary. But like any rule of thumb, this isn’t always appropriate and sometimes more than 20 times salary may be necessary, particularly if the insured person is less than 40 years of age.
2. More comprehensive assessment
The most comprehensive way of calculating the Life insurance need is to calculate the following:
- The current outstanding balances on the home mortgage and all other loans including credit cards.
- Any current outstanding business debt.
- How long you want to provide an income for your family and how much will they need each year.
- Any key expense items that may be coming up that need to be covered, such as total private school fees that need to be paid.
The answers to these questions can form a solid basis for how much Life insurance is required .
Affordability is also important. So it is worth shopping around and finding a quality product with competitive premiums for the cover you need.
Income Protection, Trauma and TPD
Similar to Life insurance cover, there is a basic ‘rule of thumb’ approach which can be applied to Total and Permanent Disability (TPD) cover. This is generally 10 to 15 times annual salary.
Trauma cover is different again with between 5 and 10 times annual salary providing an effective starting point.
Determining how much lump sum cover (ie Life, TPD and Trauma cover) you need doesn’t need to be complicated. Using the abovementioned ‘rules of thumb’ will provide a good starting point for you to help you provide an appropriate level of cover which you need to protect your family’s financial future.
The maximum amount of Income Protection cover is 75% of Income (after expenses but before income tax).
You can refer to the NobleOak ‘Life Insurance Calculator’ (www.nobleoak.com.au/calculators/) on our website for further assistance in determining an appropriate level of Life, TPD, Trauma and Income Protection cover, plus review the links provided below.
Helpful sites to visit include:
- ASIC MONEYSMART – Independent information on cover types and needs (moneysmart.gov.au/insurance/life-insurance)
- CANSTAR – Independent product ratings and information (canstar.com.au/life-insurance)
- NOBLEOAK – Free Life insurance Guide (nobleoak.com.au/life-insurance-guide/)
- NOBLEOAK – Free How Much Do I Need calculator (nobleoak.com.au/calculators/)
The good news is that if you prefer to arrange Life insurance cover without financial advice, the tools are available to do so.