Looking at some recent quote data we have noticed that sums insured are not tracking up in proportion to incomes. In fact, nothing like. This phenomenon has been noted before: it was picked up in the Massey research into insurance levels conducted about five years ago.
This is what we mean: for a couple with younger children where the average (mean) sum insured for life for an income of about $50,000 p.a. is about $510,000 the mean for those with incomes greater than $103,000 (more than double) is only about $830,000. It varies somewhat according to household composition.
But seeing it in the data from adviser quotes made me look harder at it – and wonder at the implications for needs analysis. There may be ways to change how you arrive at your ‘ideal’ or ‘recommended’ cover amounts that may help to nudge the cover values up.
The first is that the peer group for life insurance sales may cross income boundaries – meaning that people with higher incomes are averaging down the amounts of cover they think about because they are including lower income friends in their comparative set. Unlike, say, the market for cars, it is not obvious what ‘people like us’ buy in the way of insurance. If the insurance industry managed to make insurance an aspirational good which gets seen or talked about then this problem would disappear.
The second is that basing your ‘ideal’ or ‘recommended’ cover amounts heavily on income-based measures will widen the gap between your recommendation and the cover amounts likely to be eventually selected – maybe creating a ‘shock’ when you discuss it with them.
The third is that you may be better off building up recommended sums insured with fixed cost components rather than using income-based measures. Focusing on clearing debts, providing education funds, funeral expenses, and bequests should be added and agreed before then adding an income-based measure for the balance of the cover recommendation.
As we are now working on version three of the needs analysis in Quotemonster, if you are interested in this area please contact us.