Drill down into your life assurance and you may find that you are not getting suitable advice from your broker, or even good value.
Here’s something refreshing. The usual question you get asked by many brokers working in the industry is “Are you sure you have enough life assurance?”
There generally follows a chilling conversation about the certain destitution your loved ones will face if you don’t insure yourself for X amount, at which point you sign on the dotted line out of pure fear.
But my question is: have you been sold too much life insurance?
A new financial planning client of mine came to see me last week with a hand-written page of standing orders to various life companies that she’d picked out of her bank statement.
“What are all these payments?” she asked.
It was a series of premiums providing her with more life cover than she will ever need. “How did you accumulate all these policies?” I asked her. “Over the years, my broker said I needed them”, she replied. This got me thinking about the broker/client relationship. It is often the case that the amount of cover you have is directly linked to how much commission your broker wants to earn.
How much life assurance do you actually need?
When figuring out how much life assurance you need, your broker should look at the net effect of your death on the family finances. The cover should bridge the gap between your new family income – including the state widow’s or widower’s pension, any lump sums payable through death-in-service benefits or pension funds – and the costs your dependents will face if you are no longer alive.
If you die at 40 and your youngest child is 3 years old, your life assurance should typically cover the shortfall in that 3-year-old’s living expenses until he or she is 25, in other words 22 years. But as the years roll on, I’d also argue that the lump sum payable on death should also reduce year-by-year. After all, your assets are growing each year, your level of debt is reducing and the timeline of dependency is reducing as your dependents grow up.
However, many brokers simply replace the income you would have earned until the date of your retirement. This out-dated approach increases the cost of cover…and the amount of commission payable.
Why a broker is conflicted with their advice to you
Remember that your broker is a product salesperson, exactly the same as the guy in the bank enticing you in for a “free consultation”. Brokers selling life assurance are paid up to 180% of your first year’s premium by the insurance company for selling you a policy. The life assurer Royal London announced back in 2015 that it had hit an all-time high market share here and coincidently Royal London were also paying one of the highest levels of commission to brokers. I wonder if market share and high commission payments to brokers are related to one another? It is in your broker’s interest for you to sign up to policies, not necessarily yours. Product providers entice brokers to sell their products. The brokers then find unsuspecting clients. The client is the most insignificant piece of the puzzle.
Remember this – with every €1 extra you spend today on excessive life assurance means you are denying yourself c. €4 of an income in retirement.
You should expect to be sold a product by a commission-only broker or indeed by any of so-called financial consultants in the main banks. But before you sign up to any more policies out of fear, ask if what is being recommended matches your objectives. Finally, ask your broker what level of commission they are taking to set up your policy and then draw your own conclusions.