Consumers’ trust and confidence in the life insurance sector has been rattled this week after a damning report by regulators, but experts say there is still a place for the products the industry sells.
Insurers were painted in a poor light by the Reserve Bank and the Financial Markets Authority for putting sales ahead of the best interests of customers, being too slow to make changes following previous reviews, and complacency about behaviour in the industry.
They also highlighted cases where policies were sold to people who weren’t eligible for cover, premiums were charged for a policy that was no longer in effect, and policyholders not being effectively notified of premium increases.
Despite all that, Aaron Gilbert, head of the finance department at Auckland University of Technology, says life insurance still has a place.
“Without a doubt life insurance has a role to play, but it’s not a product everyone needs.”
Gilbert says those who should consider it include people with dependent children, a partner and a lot of debt, which could be financially crippling if one or both adults died unexpectedly.
He says someone living in Auckland, with its high house prices and big mortgages, may struggle to pay the home loan. “Most people couldn’t service the mortgage on one income alone.”
But he says those who are looking to buy life insurance should be mindful of what they are trying to achieve and should set a level of cover based on what they need, rather than an aspirational figure.
“If you are reasonably financially secure and losing one income wouldn’t harm that, it may not be necessary.”
Singles with no debt or dependants would ideally have a savings pot to cover a funeral, he says.
“That would be ideal. But many tend to spend it.”
Insurance is about transferring the risk from the individual to a third party.
Susan Taylor, chief executive of dispute resolution scheme Financial Service Complaints, says an important part of protecting people’s long term financial wellbeing is to ensure they have appropriate insurance to provide cover when the unexpected happens.
Taylor says it is also recognised that many New Zealanders are underinsured.
“Intermediaries, or advisers, have an important role to play in ensuring that New Zealanders both understand the importance of having insurance in place for unexpected life events, and in helping consumers to obtain appropriate cover for their particular needs. And, of course, advisers are entitled to be paid for the advice given.”
High up-front commissions have come under fire for creating conflicts of interest and the Government has vowed to crack down on them.
Tom Hartman, personal finance editor at the Commission for Financial Capability – the Government’s money education arm – says there are many good advisers out there who have a lot of integrity and put clients first.
“It is possible to get great advice.”
He suggests people shop around and interview a number of advisers before selecting who they go with, by asking how many insurers they compare, how they get paid and who they represent.
“Unfortunately, advisers are working within a certain business model. There are a lot of advisers out there with high levels of expertise.”
If you already have life insurance, you can still shop around and see if another adviser can look at what you have and make recommendations on how to make it more appropriate.
But Hartmann says you don’t have to move your business to them if it seems that they are just wanting to switch your insurance to another provider to get the commission.