Time to revisit needs analysis

Canadians are grossly underinsured and clients are likely open to increasing coverage in the current market environment, according to a new survey conducted by Manulife Financial. It may be the perfect opportunity to offer an insurance needs analysis.

Manulife Financial recently conducted a survey of more than 600 Canadians, between the ages 25 to 45, finding more than half (54%) are underinsured by even the most rudimentary industry standards.

“Basically [the survey] was telling us something we suspected but didn’t have any proof of, which is that most Canadians aren’t confident that they have the right amount of insurance,” says Paul Smith, vice president of insurance marketing and product development for Manulife Financial. “Then when you ask them what the right amount of insurance is, they are not correct.”

Smith points out only 26% knew that 10 times your annual income is the recommended benchmark. The majority of respondents thought they needed five times or less.

“There is just a small percentage of Canadians who understand what the benchmarks are for life insurance coverage. We know that 10 times annual income is a just a guideline for death benefits — even that isn’t the right answer — but for people to be guessing so much lower, usually between two and five times, is surprising,” he said. “For somebody who makes $50,000, two times coverage would only leave $100,000 which is unlikely to meet their needs if they died tomorrow.”

The financial hardship associated with being underinsured is self-evident. This risk is increased by the fact many Canadians have seen their financial cushion depleted as their investment portfolio declined.

Risk is opportunity for insurance planning

Knowing that clients are underinsured right now should be a cue for advisors to be calling clients and offering to do a needs analysis, since their client’s total financial plan has drastically changed, leaving far fewer resources to protect against catastrophic personal events, like death or a critical illness.

“Most of the clients advisors meet with probably don’t have the right amount of insurance, so there is an opportunity there,” Smith says. “In addition, they don’t know how much they need, so they are looking for advice. Advisors are really in an ideal position to deal with both of those things.”

Manulife has revised its Insure Right software, which includes an interactive video to help consumers understand their need for life insurance, as well as critical illness and disability insurance. The program also has an online calculator that help determine how much coverage a client needs base on their own personal needs.

Smith says a needs analysis is a perfect opening to revisiting a client’s insurance coverage.

“When you do a needs analysis, you determine to what extent can those assets support the family in the even of an untimely death. For a lot of people those assets have gone down significantly in the last year.” he says. “They have to look to insurance to fill that gap at least on a temporary basis until their other assets recover. That would point towards an immediate term insurance need. If that need becomes more permanent, the beauty of our industry is most term policies can convert into permanent coverage.”

Clients should tell you what they need

Another upside of a needs analysis is most clients come to fully understand that their insurance coverage is not adequate because they are they are the ones providing the answers to the advisor’s questions, says Anthony Windeyer, a CFP and insurance and estate planning specialist with Coast Capital Insurance Services in Richmond, B.C.

“The key to a good needs analysis is to have clients tell you what they need. In my experience, it’s always way more then what they think,” he says. “It’s so important that when you walk through the analysis, make sure your client has adequate coverage, but you need the client to understand the numbers are their numbers, not yours.”

Windeyer adds, “If they want to put something down from a financial planning perspective that would be inadequate, I’ll have them put it down, and sign and initial that I recommended an appropriate amount [that was more]. Almost without exception, the client wants the adequate coverage. What that shows is what the Manulife research is showing — people are vastly underinsured.”

For Windeyer, business is booming right now because clients and prospects are more open to having a needs analysis done on their financial plan.

“A needs analysis doesn’t have to be done annually, however if there are any changes in their life, such as buying a house, having a child, that sort of thing, absolutely you want to reassess what is adequate coverage,” he says. “With the values plummeting in houses and investment portfolios, this is an opportune time to sit down with your clients. They will be more open to this discussion.

“In fact, I’ve never been busier quite frankly. People are far more open to the idea that if they lose their health, they don’t lose want to their wealth.”

(04/15/09)