We have recently seen a number of changes with bank life insurers and we now have both BNZ and Westpac life insurance administered by traditional life insurance providers. Meaning that if you have life trauma or disability products from your bank, it's time to have a closer look as it may be that we can improve what you have or reduce your premiums in ways not previously considered.

How did you get here?

We have all had ‘The would you like fries with that approach’. You are standing at the teller at the bank doing your banking and they start asking you a bunch of questions. You are here now; we can do other things for you, nice and easy. Do you have life insurance; can we help you with your mortgage? Can we invest your money or look after your Kiwisaver? Or some other variation on this.

My question is why would you take advice for your insurance or investments standing at a teller at the bank? Would you take advice for chest pains from your local cafe owner? My point is they are chalk and cheese, banking and insurance.

My experience as an adviser with clients who have sourced their policies from banks you are unlikely to get the correct advice or product if you are buying your life insurance at a bank. This particularly evident with income protection cover.

Three examples, a self employed software designer, a forklift driver and a towie.

With the software designer, their posted disclosed income is quite low, an advantage of being self-employed yet they have a policy with a bank that is more than double their earnings. No trouble, right, they have the policy and it will work at claim time. Not so much! This is the thing with bank advice; one size is intended to fit all.

In this case, this person also has an investment property that also has trading losses. So proving an income can be a bit difficult. Insurance in this case will look at the individual's taxable income to base their decisions on, which they usually take a lesser than approach.

Lets say the monthly taxable income is $2,000 and their policy is for $3,600 per month. Now what people do not realise is most of these bank policies are based on you being able to prove a loss of income. Once you have proved it, the most they will pay is 75% of that loss. In this case they are insured for $3,600 per month so that is the maximum. The proven loss of income is $2,000 so 75% of this is $1,500, which is what the claim payment is likely to be.

Now we need to consider the property, because of the lower level of income on claim the existing repairs, maintenance and development program come into question. The decision is made not to do the $12,000 of renovations and development they do every year, due to the disability and shortfall in income. This flows through as a positive income from the property, which the bank policy is entitled to offset. The claim payment on the $3,600 policy is now down to $500 per month and they still need to pay tax on that. Not a particularly pretty picture if you are the disabled policyholder.

With the use of appropriate disability products, this situation could be well managed to provide an agreed level of known cover that will work at claim time. Will it be more expensive, probably. The reason it is more expensive is the policy will deliver what it expected as opposed to the minimised level of claim this particular bank policy delivers.

The heart of this question, do you pay $35 per month for a policy that will deliver $500 per month in real benefits or $55 per month for one that will deliver $3000 per month because we have more than just income protection options? I'm pretty sure which one I would go for.

On to the next two cases, the forklift driver and the towie.

They have both rocked up to the bank and had the 'fries' approach done to them.

Unfortunately for these two when it comes claim time the bank’s insurance company is likely to decline their claims for material non disclosure. Why? Because the occupation they are insured for at the time of application is not the occupation they actually do. In New Zealand, there is not an insurer who will insure Forklift or Tow Truck drivers for income protection. They will do life, trauma and medical insurance cover but not disability benefits.

They have a policy right? Technically yes, but they will likely pay the premiums for a long time until they have a claim and then have their claim declined, and the insurance company will likely not refund the premiums. This is because the client has the responsibility of disclosure.

In these two cases the clients have told the bank person what they do, the bank person has not found it on the list on screen and picked the closest occupation to it. Unfair, yes. But when it comes claim time it will be the client’s word against the bank persons.

There is no proof nor is there an opportunity for the client to review it, as they never got a copy of their application form. With Willowgrove Consulting, if you complete an application with us you will always get a copy back from us to review in your own time to make sure it is correct.

What is the solution?

In these two cases going back to the insurer and asking the questions about the disclosure, the occupation and requesting clarification on the cover the client is paying for.

1. If the insurance company honours it, great! Good outcome as they have cover they would not have otherwise ben able to get.
2. If the answer is the more likely no then the insurance company should refund the premiums paid on the income protection portion of the cover as the client has discharged their obligations in the contract.

In these three situations, the people involved would have benefited from having an adviser from the start. Fortunately, they have not had to claim so it has been caught. There are plenty out there though who have been caught out.

If you have your insurance cover directly with your bank or you are considering applying for cover online or with a bank it would pay to talk to an adviser. You are more likely to end up with cover that works with a similar premium to the products you were looking to arrange yourself as the cost of consulting and adviser is usually free to you. 

Better still get in touch with us and we will be happy to help.

 p.s a satrical take on the one size fits all approach here

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