Monday, September 17, 2007

Insurance: Are you comparing apples with apples?

I have just finished reading the real life case of a business partnership who had received good advice from their adviser. They had appropriate insurances in place two of which were term life policies to fund an equity transfer, commonly called “buy/sell”. But why would this make news?

The story begins when the partners (let’s call them Joe and John) went to their bank to meet the new business manager who was looking after their loan. He saw an opportunity to refer Joe and John for some up-selling and referred them to the bank adviser who saw a large insurance premium on the business profit and loss statement. The adviser prepared a quote showing a substantial reduction in the premium but failed to complete a fact find and look into details of the existing policy.

One of the partners, John, had a health condition which was allowed for in the existing policy but not the new quote. Joe and John asked their adviser if he could do better. He asked the two whether they were comparing ‘apples with apples’. But by now they were both viewing this as a cost issue.

He realized that he would not be able to compete on price and still allow for the loading on the partner with a health problem. They would not hear of staying with the same policy. The adviser quoted for a new cover with a rebate of commission.

An application was made. In the meanwhile the policy of Joe, the healthy client, was due to be renewed. Against the advice of the adviser who recommended putting the policy on a monthly premium he decided to cancel the cover, after all he couldn’t see any benefit in paying for insurance that he was about to cancel.

I’m sure you can see what’s coming – Joe, the healthy client had developed a condition unknown to him and his cover was declined.

The bad news was not only that he had a condition he was unaware of and that was likely to get worse but the business was now in a riskier situation than before. Unable to reverse the decision of cancelling his existing cover he now has no insurance and is unable to get any cover.

Not only that his family are now in a vulnerable situation. After all it is those we leave behind that we get insurance for.

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