How We Saved a Client $9,000 on Insurance

Why Insurance Reviews Matter

Daniel: Welcome back to this fortnight's Blueprint Podcast. Rory and I are super excited today to talk about a client's success.

Rory: Yeah, and it's in my space today, Dan, which I'm pretty excited about. Insurance has been a part of our business for about six months now.

Daniel: Yep, and the process that we're going to work through in this example—we've been having a lot of success. What I mean by that is clients are really understanding the advice.

Rory: Yeah, because there's a bit of an art form to this, you know—there's a balance between having protection and what it costs.

Daniel: So, cost is king. In this particular example, we saved a client $9,000, or will save them that over the next 12 months.

Rory: Holy ****.

Daniel: Yeah, so it's a pretty—excuse my language—it's a pretty massive win.

Rory: And, you know, we just want to pre-empt that that's not our goal—to reach outcomes like that. They're pretty rare.

Daniel: Yeah, and a lot of the time we're actually dealing with first home buyers, so we're not saving them any money on insurance. We're setting them up for the first time.

Rory: That's right. But it also highlights the importance of people who have had cover in place for a long time having a review.

Daniel: And this is the case, but we work through this process with clients who are new to insurance and clients who already have insurance. It's the same process.

I think the thing that excites me the most about it is the term that we use—it's a risk analysis, right? Because when people think insurance, they think, "Ah, it's extra cost I've got to pay for," but when you actually take into account what it means for your financial journey, it's a risk analysis. The structure of your insurance should actually be changing over time—maybe not constantly, but every five to six years—based on how your income's changing, how your debt level's changing if you're a property owner or investor, and how much your household relies on you.

Rory: Yeah, absolutely.

Daniel: So I think it's super exciting because in our space, it's the most tailored part of it. When you get a mortgage, many times it's pretty stock standard, especially for first home buyers. The recommendation will be pretty similar, depending maybe on how much deposit the client has. But for insurance, it can be so varied because of how the income of the household is structured, what sort of debt they've actually got, and what their long-term financial goals are. But absolutely, we can put that doorstop in for anyone, and then it's about how you make it fit within the budget.

But mate, that sounds ridiculous, that we're saving someone $9K on their insurance.

Rory: It's crazy.

Daniel: Yeah. You mentioned a buzzword there—risk analysis. In insurance, we call it a needs analysis.

Rory: Of course, that's right. And here at Blueprint, we call it a strategy session.

Daniel: Yeah, that's right. So, without further ado, let's have a look at this example.

Rory: Yeah, let's tuck in. I love a spreadsheet.

Breaking Down the Client's Cover

Rory: Let's run through it. The first thing we look at is what cover the client already has in place. In this particular case, I haven't broken it down, but they've got pretty comprehensive cover.

Daniel: Yeah, they've got medical, they've got income, they've got life, and various other products in between.

Rory: Already in place.

Daniel: Already in place. Awesome.

Rory: In this particular case, the cover was offshore, so there were a few issues with it. The cost was one, the sustainability of the premium was another, and then there was a bit of exchange rate risk. Just for where it's based—we won't dive into too much about where it was located and stuff—but insurance is meant to be there as a safeguard and take away risk.

Daniel: Yeah, there were a few risk factors with this insurance policy that we wanted to remedy.

Rory: I can almost guess the part of the world or the kind of part of the world that this insurance is from—you know it well.

Daniel: Yeah, yeah, yeah. And what are we calling our client for this case study?

Rory: Client X.

Daniel: Awesome. Okay, cool. So, completely anonymous.

Rory: Yeah.

So, to start with, there are three areas of personal risk. There's medical costs—we have private medical cover. There's what we call disability benefits, and there are a few products that fit into that category: income and mortgage cover, trauma cover, total and permanent disability cover.

Daniel: That's right. That's really the crux of our exercise today—focusing on those areas, because that's where there's the most juggling numbers, for sure. We'll also look at life cover as well—that's the third category of risk.

Rory: So, page two of our spreadsheet. It's quite basic what we put in here, but we've got the income details. If we're dealing with a couple, we'll obviously have two incomes. We've broken down their deductions, which will become relevant later on. This particular client has a $50,000 mortgage, so they're in a pretty outstanding spot, debt-wise.

Daniel: Brilliant.

Rory: Yeah, so they're at the business end of their mortgage—almost mortgage-free.

Daniel: They are, yeah. So they're really looking towards retirement and putting funds away for that.

Rory: Yeah, and so that's where their insurance policy was a bit of a handbrake on maximising their investment goals as well. So, a really good position—no other debts, a little bit in KiwiSaver, they've got a bit of cash, and that's what we've got.

So what we do then is this all carries over into their cashflow statement. This is what we look at with every single client, and there are one to three variables here. There's one or two incomes in the household generally, and there might be some other income if we're looking at someone with an investment property or a side business or something like that.

But in this case, you can see we've got a net income of $5,600, total expenses of $3,800, and then their net is about $1,700 per month.

Daniel: Yeah, so it's a basic budget just based on their fixed expenses. It's a basic budget, mate, but the thing that's popping out is that 18% for personal insurance.

Rory: Yeah. Do you like that pie graph?

Daniel: Of the gross income, it's 18%, which is gross. So of the net income, it'd be like 26–27%. It's huge.

Rory: Yeah, and look, it's not crippling this person. He obviously lives well with it, as means if he's got a small mortgage as well.

Daniel: He's good financially, you know, we're getting a good overview of who this person is.

Rory: Absolutely. But it's pretty alarming when your personal insurance expense is almost the same as all your other essential expenses combined. And that's the case here.

Calculating the Right Cover

Rory: The first product we look at is income cover. On the right-hand side, there are maximum calculations. There are two ways we can calculate income cover: on an agreed value basis (so there's no tax, and we can insure up to 62.5% of their gross income), or a taxable income cover, which is subject to tax and therefore tax relief as well. Even if you're on PAYE, you can claim a taxable income protection.

Daniel: Oh, that's brilliant.

Rory: Yeah, there aren't many things you can, but income cover you can, if it's a taxable benefit.

Daniel: Incredible.

Rory: And we can insure up to 75%. So what we're looking at here is if we take away this client's income, the deficit is about $3,800 in the red. This varies quite a lot when we're looking at couples, for example—sometimes we meet with couples who have a similar income, sometimes there's quite a big difference, so there'll be really different amounts to get this spreadsheet or this cashflow back in the green.

So at a minimum, we want to be breaking even. In this particular example, the client actually took the full sum of agreed value, and you can see here, plugging that insurance gap with $4,825 cover, they're back into the green.

Daniel: So if for some reason you can't work, that's the insured amount he's going to get net in their hand.

Rory: Absolutely, that's the one. Net, no tax. A couple of other variables down here—what we look at is wait periods and payment terms. Generally, we want a payment term to the age of 65. In most cases we do—it's the best type of cover for that long-term protection, for sure. It's going to cost a bit of money to do that, so that's why getting the sums insured correct or reasonable is important.

And then the wait period—in this case, we've gone for a 13-week wait, which is what we aim for. It seems like a long time, but it's the best period to maximise efficiency in terms of the cost of the policy.

Daniel: For sure.

Rory: And the reason we can justify 13 weeks here—the client's got $20,000 of cash. He's got some KiwiSaver—we don't want to touch that if he's ill, but he does have that. But the cash, he's got enough to get him through three months.

Daniel: Brilliant.

Rory: The next disability benefit we talk about is trauma cover. There are lots of different ways you can spin this, and different advisers will do things differently. We can do multiples of income, gross income, net income, we can cover mortgage or total essential expenses, or we can just do a generic amount as a recovery fund type thing.

Daniel: Yeah, so the way we do it is we look to plug the gap from income cover in the client's net income—that's how we do it as a starting point. In this example, we've got 10 years of cover, which means that the income protection with the trauma cover of $100,000 means there's no financial loss over a period of years.

Rory: You're topping them up for 10 years.

Daniel: We're topping them up for 10 years.

Rory: Awesome. So that's got them covered in most cases. A lot of the time we only look at two or three years, and that's typically because we've gone for a lower sum of income cover. But this client's got a lot of income cover, so $100,000 covers them for 10 years.

Daniel: Brilliant.

Rory: Total and permanent disability—so with this one, it's worst-case scenario, right? You can never return to work again. It's a pretty tough diagnosis. Again, lots of different ways we can calculate it—we can look at debt, replacement income, and again, just generic recovery funds.

So in this case, we've gone 25 years total income replacement, which takes this client to age 65. So it's $150,000 as a top-up. It's a pretty small amount of permanent disability.

Daniel: Yeah.

Rory: He's got the to-age-65 payment terms, so he's pretty well covered in his income cover.

Daniel: Brilliant. This is just a little top-up.

So is this pretty similar—I know we're going to get into it in a second—but is this pretty similar to his existing cover, but also a new recommendation based on his current situation? Because his current cover is also not quite fit for purpose with what he's paying, right?

Rory: Correct. His current cover's quite different, to be honest. When we're looking at it, and because his cover was comprehensive, we do this type of review. Some clients might just want to price check the market—they go, "I've got a million dollars worth of life cover, $200,000 worth of trauma cover, this is what I'm paying. Am I overpaying?" And we quote the market and go, "No, it looks reasonable, it's okay," or, "No, you are overpaying." Oftentimes we can save money in those cases—could be medical loadings, things like that, that haven't been reviewed. So no, this structure's completely different for this client.

Daniel: Awesome.

Rory: So that's TPD. For medical cover, for now we'll skip that, Dan, because there's not a lot of calculating that goes into it. We choose an excess and we discuss the product—it's pretty straightforward.

Daniel: Yeah, there's a bit to it in how it works alongside the public health system and ACC, etc., but for today, we're just sticking to the crunchy numbers.

Rory: Oh yeah. So the last benefit was life cover. Earlier on, we saw this client had a $50,000 mortgage left, no dependents. He didn't have a great need for life cover, so he had a reasonable sum existing. But he's got a lot of equity in his home, some cash, some KiwiSaver. We've gone with $50,000 of life cover just for final expenses, legal fees, the funeral, that sort of stuff.

Daniel: Yeah.

Rory: And you can see that gives him a total estate of $900,000, excluding his car and contents and stuff like that.

Daniel: Yeah, he could have had $0 if he wanted to.

Rory: Yeah. See, this is a great example of a client where, because of his life stage, he's utilising the other products, where most people, it'll be based around the life cover, then you've got your accessory of your TPD, your trauma. But this guy, he's able to just lean on the other products more so than the life cover, because it just doesn't make sense for him to have a big lump sum. He's got his house nearly paid off, he's leaving a legacy there.

Daniel: Absolutely.

Rory: So he doesn't actually need it.

Daniel: Not at all. No, 100%. Medical and income was really important for this client, and so that's what we've done.

Quoting and Delivering the Savings

Rory: Oh, incredible. So the last thing we do, Dan, is bring it all together and summarise it. We also then look at what's in place—what are we looking at in terms of our recommendation, what's in place, are there any areas where we think the client's over-insured or underinsured. Then that becomes a conversation with the client, for sure. This client had a ton of insurance, right, but for this exercise, we're not going to do a product comparison or benefit comparison, but that's what we do at this stage. Once we've done that, we go and quote this up.

And so we will show the viewers what we do for that—Quote Monster.

Daniel: Quote Monster.

Rory: This is a very iconic page for insurance advisers in New Zealand.

Daniel: I couldn't do my job without it. Well, I could, but it would be a lot more difficult. This is a great tool—big plug for Quote Monster here.

Rory: What we do is we put in client details and then you can see a list of benefits that we can select. I haven't actually quoted this entire package because I don't want to highlight insurer pricing and the price differences—I don't want it to be about that. So I've just done a little nominal amount of life cover and trauma cover. But you can see here that it quotes the market, and with the benefits I've chosen, there's hardly any difference in price. With this particular package, there's quite a lot of difference in price in reality, but we don't want to get into the weeds in different companies and stuff.

The other thing we can do here, and while we're here I'll highlight it, is if we are looking at replacing benefits or even just recommending benefits, we can go in and compare.

Daniel: Directly compare.

Rory: Yeah, directly compare testing or other options.

Daniel: Yeah, absolutely. For example, if we were looking at trauma cover and I've just selected AIA and BNZ, we get some benefit scores—what's covered under a policy, what's not. You can actually see here, so AIA is one of our main insurers, and BNZ Life (which has been taken over by Partners Life now, so these products aren't on sale), but you can see here there are 15–20 odd conditions covered by one company that aren't covered by another. So, like, blindness—you could hold a trauma policy and go blind, and one company pays you out and one company doesn't.

Rory: Not sure about you, but I think going blind is a traumatic condition.

Daniel: 100%.

Rory: Yeah. The main providers, you won't see big differences like this, but we do see it elsewhere in the market. So anyway, we quoted up, Dan, and we come back to our spreadsheet.

Alright, Dan, so we've gone into Quote Monster, we've got our starting package and we've quoted it up. Then we come back and we want to present this in a way to the client, or we see what it's going to cost as a percentage of their income and present it in plain English.

Daniel: Plain English, mate.

Rory: Yeah, absolutely. This is really important because, like, you've just gone through a bit of this process with me and a lot of talking from me and all these different products, and by the time we get to this point, clients are going, "What is this going to cost me?"

Daniel: Yeah.

Rory: And I tell them, "Look, we will get there. We'll get there and we'll make it work." So we plug it in here. I've got a few numbers up here—ACC deductions on a monthly basis, and their KiwiSaver—the kind of rules of thumb that we work to.

So ACC is insurance for accidents and it's generally about 1.6% of gross income. There are rules of thumb that we work to—as we know, ACC is insurance for accidents, and it's generally 1.6% of gross income. Slightly less on higher incomes—there are caps to ACC because there are caps to the replacement. The minimum KiwiSaver contribution that most Kiwis are doing is 3%.

So what we find is that an insurance premium in that range is generally affordable, and we can often get the package that we've just gone through for sure. With medical, it can be more expensive, so it can go up to about 5% of gross. Higher than that, obviously, depending on the client's situation, and it's a little bit steep. So at this point in time, I plug it in, see how it's looking, and then I'll do some amendments based on what I would look to do first, to refine it and get it down to a more comfortable level. Obviously, clients have the final call and they're the ones that know what's important to them.

Daniel: Right, absolutely. Because some people might prioritise private medical cover over a trauma policy or TPD, you know?

Rory: Absolutely. I might put together a package that's 2% of someone's gross income and they say, "You're dreaming, mate." And I go, "Cool, what's your budget?" Then we work to that, and I'll guide you on what amendments I would make, for sure, based on your budget. And that's absolutely fine.

Daniel: So you'd say 2% and they'd say, "You're dreaming"—as in that's too expensive?

Rory: Yeah, sometimes. Sometimes people want more.

Daniel: Yeah, of course.

Rory: Yeah, I think I'm over 3%. I'll have to look at it again, but I try to at least stay above in that 3–5% region of cover.

Daniel: Yeah, I think that's where you have to be. The key things we're looking at here—like the 3% to your KiwiSaver—you have to keep that going in the event that you can no longer work. People just forget that your income is your biggest wealth-building tool over the length of your life. You have to keep those contributions going, you have to keep the consistency there.

Rory: Yeah, 100%. I saw a quote from a monk recently, and it said that humans have got hundreds of problems, until you have ill health, and then you've got one.

Daniel: Yeah, exactly. So with this insurance, we don't want finance to be one of them as well—a problem if we're ill.

Rory: 100%. I thought you said for a second you quoted a monk, like you're doing a policy for a monk, which I would love to—that should be our next case study.

Daniel: Yeah, absolutely.

Rory: So anyway, mate, back to the drawing board. We've quoted these benefits—$160 a month. We've actually suggested they retain some of their current cover, which is $223 a month, and we're just a shave under 5% of gross.

Daniel: Brilliant.

Rory: So I've taken this to the client, I've also got a few other options up my sleeve, and so we're at 4%. We're at 4%, so this is pretty good, and they've got medical, they've got really comprehensive income cover.

Daniel: Yeah, if we recall from the cashflow, initially we were at 18%. So we've shaved off more than two-thirds of their premium, which was over a thousand dollars, and given them a similar amount of protection—we're not taking too much stuff away.

Rory: No, we're giving them what they need at this current point in time, explained it in a way that they understand through this process, and they've gone, "Absolutely, that's what I need. Sign me up."

Daniel: Yeah. So in this particular case, we go through—usually when we're amending benefits, we're making it more affordable. In this particular case, the client wanted a bit more certainty over premiums, because one of the things we were reviewing with their current cover was unsustainable increases in premium.

Rory: Yeah.

Daniel: So we made some amendments, and with their life cover and their trauma cover, we've gone level to age 65. Total and permanent disability income cover—we've levelled that for 10 years as well. So, giving them certainty, and they were quite comfortable with the increase in premium. The increase in premium put them up to around 7% of their gross income.

Rory: Awesome. So we've still saved them 11%. Over the next 12 months, we worked it out—it's about a $9,000 saving. Over 10 years, the current policy would have more than doubled, and this new policy with these levelled premiums is going to have really gentle increases. So over 10 years, $9,000 in year one—you do the maths, and with that client intending to invest that money...

Daniel: Yeah, I was just going to say—six figures over 10 years, for sure.

Rory: Oh, at least. And in the next 10 years, that compounding effect of that cash, it just grows exponentially.

Daniel: Absolutely. For our clients that wouldn't know—level versus stepped: level cover, explaining from a guy who's not an insurance adviser (so you can correct me)—level, the price is not going to change over time, it's going to change a very small amount. Stepped, that's going to increase with your age and with CPI and that sort of stuff, right?

Rory: Correct. So, pretty much correct. With level premiums, they won't increase for age, and that's the biggest increase—just for CPI, they could increase for CPI if that's attached to the policy, and they could also increase, unless it's guaranteed, if the insurer increases their product due to claims experience. Some providers will offer guaranteed level on life cover only, because it's quite predictable in terms of claims. Trauma cover, you don't generally get a guaranteed level premium. If the product price increases, everybody wears that, but you won't get age-related increases. Costs more initially, saves over the long term. Really good if you've got a need for cover and you can see the need for it longer term to flatten it out, or if you just want absolute certainty over what you're going to pay year over year.

Daniel: Very good.

Rory: Cool. This is how we do it, mate. Any questions?

Daniel: No, man, that's awesome. Honestly, it's making me think that I need another insurance review with you, even though we just had our review a couple of months ago.

Rory: Yeah, well, I just want another one.

Daniel: Let's absolutely—I think we can upsell you.

Rory: Yeah, I need some extras, I need some frills. Having this after you having the mortgage strategy session—it's so important because we take so much time and effort, the clients work so hard to get debt-free faster, make sure they're investing in their retirement, work on investment property. If you don't have your income, that plan's not going to go ahead, and when we forecast the retirement amount of, you know, net $6 million, $7 million, which is what you need to safely withdraw the funds for your retirement, it's just not going to happen. So it goes hand in hand, and it's a really nice transition for our clients to make sure that we're on the right track.

Daniel: 100%. We're probably looking after about half of our clients' mortgages and insurance as well, which is really great. The other half have got their own arrangements. There's a couple that don't have insurance, but that's a case by case, right, and everybody does their own thing.

Rory: Awesome. Cheers, Rory, that was awesome.

Daniel: Thanks, mate. Thanks for enduring that with me. Alright, well, thanks so much for listening, guys—to our existing clients, our referral partners, our business partners. We really appreciate you guys supporting Blueprint, and hopefully you found some value in this episode. We'll be back soon. Cheers.

Rory: Cheers.