First published Cover online October 2019
At FMI, our life insurance philosophy is founded on a core belief that your client’s income is more than just their monthly salary; it’s what supports their future ambitions and dreams. That’s why we’re on a mission to change industry behaviour by shifting current industry norms from the traditional lump sum approach, to one that champions income benefits first.
The Income First approach is effective because it replaces 100% of a client’s hard-earned monthly income when they’re faced with such unfortunate circumstances. With multiple advantages for both advisers and customers, it should be an easy choice for advisers to make:
At application stage:
- Easy sell. Income benefits mimic the income stream you are trying to replace when planning for an unexpected risk event. This should be easier to explain, and therefore easier to sell.
- Simplifies advice process and reduces advice risk. There are fewer calculations and assumptions with income benefits, compared to using a lump sum benefit to provide a future income stream.
- More investment opportunities. Premium savings can be invested towards retirement or investment funds. Plus, a client with a guaranteed future income stream is more valuable than a client that may (or may not) come to you with a lump sum pay-out.
Over duration of policy:
- Reduced lapse rates. According to FMI’s 2017 Lapse Report, lump sum benefits are 66% more likely to lapse in their first year, compared to income only benefits.
- Simplifies policy servicing. Income benefits make policy servicing and annual reviews simpler. All you need to do is understand what may have changed in their lives, and update the policy with your clients’ latest monthly income to ensure they have the correct cover.
At claim stage:
- Builds trust. Trust ultimately leads to long-lasting, indispensable relationships, and is developed by offering solutions that will deliver when your clients need it most.
- Creates a client for life. With the guaranteed monthly income, your client is likely to continue other policies and investments, which ensures longevity for your business.
- Mitigates investment and inflation risks. Your clients do not need to worry about investing a lump sum of money, and the future impact of inflation, which in turn reduces advice risk.
But even if you believe in an Income First philosophy and the many advantages to this approach, we understand, that in practice, there are some hard questions to answer for older clients who already have lump sum cover in place. How do you, as an adviser, convince a client who has been paying premiums for years on a policy to reduce their lump sum benefit and replace it with an income benefit?
Let’s use a practical example to address this valid concern.
Jason is 45 years old and earns R40 000 a month, with R10 million Disability Lump Sum cover in place. Based on retiring at 65 with 6.5% annual nominal salary growth, his future income, even at this age, is worth R18.6 million (nearly twice as much as his lump sum cover).
Now, let’s consider the possible risk scenarios he faces, and the probabilities based on FMI’s claims stats:
Scenario 1: Best-case scenario
Let’s take the most ideal circumstance and imagine Jason is lucky enough to never fall ill or become injured during his working lifetime, and therefore never needs to submit a claim.
Even in this unlikely instance, Jason would be better off with an income benefit because they are often cheaper than the lump sum equivalent and will save him thousands of Rands over the course of his working career, which he could add to his retirement or investment fund.
Scenario 2: Most-likely scenario
A more accurate account is that Jason does fall ill or becomes injured, given his 85% chance of experiencing a temporary injury or illness before he retires1.
Scenario 3: Worst-case scenario
Jason is unable to work for 2 years or more due to a long-term injury or illness, or he’s permanently disabled.
Out of all of FMI’s claims lasting longer than a year in 2018, 40% were not permanent. This means that 4 out of 10 times, a disability lump sum would not have paid out, but Extended Income Protection would pay out in every instance. Therefore, income benefits are a better bet because they pay out on long-term and permanent disabilities.
We do, however, understand that some customers may want to settle their debts should they become permanently disabled, so we introduced the EIP Commutation option, where your clients can convert up to a third of their income to a lump sum payment should they become permanently disabled. Giving them the flexibility and agility to adapt their cover when they need it most.
The long and short of it? Don’t let your clients be tempted by the perceived value of a lump sum pay-out. While enticing, defaulting to lump sum cover is the conventional approach, and is in fact much riskier for you and your clients. Use FMI’s Reality Check Quiz to support this conversation and demonstrate the value of the Income First approach.
Believe in the power of the advice you’re providing; know you’re making an impact by giving your clients a robust insurance solution that takes care of their needs, today and in the future.
1FMI 2019 Risk Stats – Temporary disability, unable to work for 14 days or more.