By Tose Gava
In my last blog Part 2: Traditional Funeral Insurance – A Focus On Embedded Structural Efficiencies, I extensively discussed fundamental issues relating to traditional funeral insurance’s in-built structural inefficiencies. The blog raised a lot of debate and feedback in terms of product structuring and issues of value for money and treating customers fairly from a regulatory point of view.
In this Part 3 blog: Traditional Funeral Insurance – A Mass Market Product That The Mass Does Not Understand, I will focus on wide misconceptions on how insurance works. There are some basics that an average consumer must understand to appreciate the insurance value proposition.
In the final of the series, Part 4 blog: Funeral Insurance: Measures Clients Can Take To Mitigate Risk of Policy Lapse Due To Non Payment of Premiums, I will try and educate policyholders to understand that an insurance policy is a contract wherein each party has duties and responsibilities. The policyholder is contractually supposed to to keep up with agreed premiums or lose the cover.
RELATED: FUNERAL INSURANCE DEBATE:
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Funeral Insurance Debate: Why cash-based funeral plans are the future
Challenges of Treating Customers Fairly in Funeral Insurance Industry
Having highlighted all the fundamental challenges on product structure inefficacies, there are basic insurance principles that an average consumer must understand when it comes to how insurance works. Broadly, there are 7 principles of insurance, namely:
I will, in future blogs, discuss the 7 principles in detail. In this blog I want to keep it simple and just focus on the key responsibility of the policyholder which is to keep up to date with premiums, and more specifically on your funeral policy.
Needless to say, even in markets where funeral policies have become a ‘lifestyle essential’ product, there are serious consumer misconceptions on how insurance works and that creates serious problems when certain expectations are not met.
In markets like Zimbabwe and South Africa, a funeral policy is a mass market product, but do the masses understand the basic principles or fundamentals of insurance? It is important that an average client understands that an insurance product like a funeral policy is what is called pure protection insurance; it’s not a savings plan and it does not have surrender value. The same applies to other pure protection policies like medical insurance, car insurance, life cover, home insurance and contents insurance; they are not savings schemes that you can cash-in in the future.
What then are the policyholders paying for? The policyholder is basically paying for protection month-on-month and for the peace of mind that, for the small monthly premium, you get a huge benefit if anything was to go wrong. Premiums are paid in advance as the policyholder is basically buying protection for the following month. If one then defaults, the global standard on policies like life cover is that a policyholder remains protected for a short grace period to allow them to regularise by clearing arrears before the policy lapses. The grace period could be as short a one week depending on the policy terms and conditions.
Insurance policies are contracts and once the policyholder misses a premium payment, they become exposed to cover lapse or policy cancellation. It is therefore imperative that the policyholder keeps premiums up to date. You cannot continue to enjoy cover based on how long you have been on the policy because the previous premiums were allocated to protect you in the previous months. This is the same reason why you don’t get a refund when you stop your car insurance even if you were insured for say 30 years without suffering a single accident. Equally, you don’t get refunded on your medical, building and/or contents insurance no matter how long you hold the policy without making a single claim. The same principle applies to travel insurance.
Insurance is largely based on aggregation of policyholders’ contributions and no insurance business would survive without premium receipts; that is why viability measures like gross and net loss ratios are very important. The expectation by some policyholders that cover can continue without paying contracted premiums simply highlights a lack of knowledge on how insurance works.
Insurance businesses build risk management capacity through underwriting, reinsurance, reserves/capitalisation and that is not to say policyholders can have cover without paying premiums. Once, on risk, policyholders can start to accrue benefits, but they need to continue paying their premiums to remain covered. It is important to realise that the benefit/insured value is not isolated and directly equivalent to premiums contributed because the basic principle of insurance is that for a small premium you get a huge benefit if anything was to go wrong.
When policyholders mourn about their policies having been cancelled after missing monthly premium payments it shows lack of understanding of how pure protection insurance works. A policyholder cannot continue to have protection if they stop paying for it. Naturally, people are selfish and policyholders making claims after hardly contributing enough to deserve a pay-out never say don’t pay me anything because I haven’t contributed enough. The same policyholder would demand their premiums back if they cancel the policy or the policy is cancelled due to non-payment of premiums. Sadly, you cannot eat your cake and still have it.
When a policyholder asks, where is all the money I contributed to date? The answer is that it was used to protect you since your policy started. Unfortunately, clients don’t want to accept that because they want to think of their policies as a saving plan when it suits them. If it was a savings plan, then on claiming, the policyholder would only be refunded their total contribution plus interest earned.
Truth be told, with insurance there are always going to be policyholders who pay more than they will benefit and others who benefit more than they contribute. Equally true, policyholders take insurance to protect against certain identified risks but in realty every policyholder’s wish is never to claim.
Even if one was to never claim, it should be remembered that the biggest benefit that any policyholder is paying for is peace of mind which means that all policyholders benefit more than they contribute. You buy insurance for peace of mind and hope that you would never have to claim. In other words, no-one buys insurance and looks forward to claiming unless it’s a scam or money laundering transaction.
- Diaspora: 10 Scenarios Where Your Funeral Director Provided Funeral Policy Will Let You Down
- Diaspora: 14 Reasons Why An Increasing Number Of Diasporans Are Being Buried Abroad
- Diaspora: 12 Reasons Why Cash Denominated Funeral Policies Are By Far Better
By Tose Gava is a UK Based Financial Advisor & Insurance Specialist; he writes in his personal capacity. He can be contacted at email@example.com