An insurance conversation without product: how to really talk to clients about risk and the value of life insurance

Family budgets are a near-constant battleground of competing priorities. Costs are rising but wage growth isn’t necessarily keeping pace, making it harder for people to decide which expenses to prioritise. This is where your role as a financial adviser can help clients understand what is truly important to them and provide clarity on financial decisions.

When it comes to insurance, clients may struggle to see the value in premiums if they can’t connect to their overall financial objectives. This disconnect between cost and benefit may mean clients choose not to take out cover for risks they are exposed to in day-to-day life.  And by Australians’ own standards, underinsurance levels continue to grow. The Financial Services Council (FSC*) recently commissioned a study looking at attitudes towards life insurance. About 15 million Australians hold life insurance, paying a total of $17.3 billion in group life and individual insurance premiums each year.¹

The study compared the level of insurance coverage Australians believe they should have with how much they actually have.

Based on the data collected, the FSC estimates 1 million Australians have less death and total permanent disability (TPD) coverage than they claim they need. Income protection insurance was worse, with 3.4 million Australians underinsured when compared with public expectation.²

Increases in the average mortgage size across Australia’s capital cities is exacerbating this problem. Bigger mortgages mean bigger mortgage repayments. Against this economic backdrop, most Australians only have enough in their savings to get by for 100 days.

If injury or illness prevents them from earning, they could run out of money in as little as three months. Adequate insurance coverage is therefore more important than ever.

Not so super: group coverage not always the answer

A lot of Australians will have some level of death, TPD and income protection insurance through their superannuation fund’s group policies.

More to the point, the level of coverage provided through super may not meet the public’s definition of adequate insurance, based on the FSC’s findings.

To ensure Australians can meet their own expectations for insurance coverage, it’s essential they understand risk management and the value of appropriate insurance. This is where personal risk advice is invaluable.

Talk to your client about what risks they want to cover

At the core of this process is a conversation about the risk management process itself, not necessarily an insurance product. can then help tease out a discussion on the ‘what if’ consequences of that event occurring, and a follow-on discussion about how comfortable your clients would be with the consequences.

If your client is uncomfortable with their current risk exposure, the natural evolution is to consider how they can manage that risk. If there is no method available to manage this risk as-is, insurance can represent a way to make those risks more manageable.

Once a client has identified the areas that require coverage, advisers can apply their standard insurance approach to determine the value necessary for providing complete coverage of their clients’ overall risk exposure.

This is the fundamental to a sound ‘needs analysis’. These sums insured are now clearly tied to a need that clients themselves have identified, meaning buy-in is already achieved.

Be realistic about accommodating your client’s budget

There is always the issue of budget, and it may be the case that there is a mismatch between the risks the client wants to cover and what they can realistically afford to pay.

In this case, present two options: a client can either find additional money to fund the premium that covers all their risk or accept a higher level of risk themselves by not totally covering all the things identified.

In the latter case, it should be clearly noted to the client they are now accepting some of the consequences of maintaining a level of self-insurance against those risks.

Ideally, advisers should offer a meeting point between affordability and risk comfort, and regularly check-in with clients over time to ensure the mix continues to meet their priorities.

It’s also important that this process is structured and repeatable across your client base.

Tips to help get client buy-in

When it comes to positioning risk advice, there are several tips which can help get client buy-in:

• Outlining the cost of alternatives can often show that paying insurance premiums is a more palatable option. For example, highlighting the cost of continuing to service additional debt – or taking out more debt at higher interest rates – rather than having debt and expenses covered through an insurance premium.

• Considering the context of other expenses is also important. How does the certainty of being able to replace your income or pay off debt and medical expenses during the toughest time of your life stack up against having one less streaming subscription?

• There are other ways to express this context, too. Consider income protection – imagine you show clients the percentage of income being covered vs the percentage of income being paid as a premium. If they knew they were covered for 70% of their income for five years at claim time, they might be more comfortable paying a premium cost of less than 1% of income per year.

Client-focused compliance outcomes and ethical risk advice

To deliver this value to clients effectively, it’s important to consider your ethical obligations when providing advice:

• Standard 5 of the code of ethics makes it clear that ensuring the client understands the advice is critical. For risk advice, this could include highlighting what their risk exposure would be like now and after implementing your advice and recording – in their own words – how comfortable they are with the outcomes. It may also include more structured tools like an insurance/self-insurance matrix.

• The code of ethics also mandates you consider the broader implications of your advice to clients (standard 6.) That means weighing up the cost of insuring different risks in comparison to spending money on other objectives, along with implications of structural choices such as ownership and funding on the end claims and taxation outcomes. It’s a lot easier to meet standard 6 by starting with a broader conversation about risk and client priorities instead of starting on product offerings.

• Cash-flow analysis is a great tool to substantiate advice choices. In scenarios where affordability leads to a compromise on risk coverage, having justification that clearly shows cash-flow constraints immediately illustrates the intention behind your advice.

• The best interests duty is not just about today but the long-term sustainability of your advice. Insurance costs need to be carefully weighed against future affordability and cumulative expenses – especially when compared to putting those funds towards alternative objectives.

Advisers have an essential role to play in helping Australians bridge the gap between their own expectations and the insurance coverage they hold. Using the techniques I’ve outlined here, advisers can go about providing great risk advice in a manner clients can clearly understand and consider.

1. NMG Consulting, Australia’s Life Underinsurance Gap: Research Report (Prepared for the Financial Services Council), October 2022. Accessed June 2023.

2. Financial Services Council, Media release: “Good advice would see a million more Australians with the life insurance they need”, 20 October 2022. Accessed June 2023.