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SIMON BROWN: I’m chatting with Clyde Parsons, Brightrock’s chief innovation officer. Clyde, I appreciate the time today. Life insurance. Life policies are an important part of financial planning, particularly if you’ve got dependents, so that if you do pass on, they don’t lose your income. It is a crucial cog in the bigger picture around that financial plan.
CLYDE PARSONS: Good morning, Simon. Absolutely. It’s a critical cog in that financial plan. As you say, that income – both for yourself and your family, as well as your dependants – is probably your biggest asset. If you think about what we insure, we insure our assets that will have an impact on our lives were we to lose them. So losing that ability to earn an income, both for yourself if you get disabled, and for your family if you were to pass away, is absolutely a critical part of financial planning. You’re right.
SIMON BROWN: I want to touch on income protection in a moment. But staying with life policies for now, that could just be a legacy. I look at myself for example. I don’t have any dependants, so it’s not an issue. But maybe I want to leave it to kids or somebody else if I’m able to. It can be more than just replacing. It can be a legacy as well.
CLYDE PARSONS: It can be, absolutely, Simon. It can be part of a bigger plan which includes legacy. And long-term insurance or life insurance extends beyond that part of covering your salary to a legacy, covering debts, paying off your asset-protection needs, looking after kids, looking after schooling into the future.
And then also in the business space life insurance is very useful – for example in contingency liability for a business, or future business legacy planning in terms of shareholding. Who is going to get my shares and why, and how are they going to afford them? So it has great uses across the spectrum.
SIMON BROWN: I’d actually forgotten around the business. Obviously there are key … For example, I own a company with somebody else. If I pass, now my heirs own the company. That can be restrictive. But I can create a policy that will effectively enable the remaining shareholder to buy me out. They receive the policy, they buy me out, my heirs get money instead of shares.
CLYDE PARSONS: Absolutely. And your business partner gets the confidence that your heirs aren’t going to be meddling in the business going forward.
SIMON BROWN: [Chuckling] Yes, one hundred percent on that. You mentioned income protection as also being crucially important. One [provision] is obviously for passing away, but [another] is just for being able to earn an income of any sort. What we are seeing is sort of newer-generation products that come with some flexibility between lump sum or guaranteed income amounts at the point of claim. Again, it needs to be part of that bigger sort of financial plan.
CLYDE PARSONS: Definitely, Simon. Unfortunately, income protection is often one of the more overlooked parts of life-insurance planning, especially with younger clients. We think we’re invincible, we think we don’t need life insurance. When you think about life insurance, you know the clue is in the name – is it just [for] when I die? But actually protecting that income is critical and crucial, you’re right.
We’ve seen incredibly exciting movements in the South African landscape in terms of unique new products coming to market that match clients’ needs much better and give them far more certainty and efficiency in the way products are priced.
For example, you mentioned the income and lump-sum conundrum. Historically clients were stuck between the devil and the deep blue sea. Do I buy a lump sum to give me a once-off payment for all the future pay checks I’m going to lose, or do I buy an income-protection product that gives me a monthly payment?
There are downsides to both. But, as you mentioned, new-age products have come to market recently in South Africa that give clients and advisors the flexibility to wait until you’re disabled to make that choice. So for example, someone with a bad prognosis – something like, let’s say, cancer stage three, where medically the prognosis is not good – if you’ve got an income-protection [policy] which is going to pay you every month for the next 30 years, that’s not going to be much use to your family, whereas if you could capitalise all those future 30 years worth of payments into one massive lump sum, that’s going to give you much more value, which is what you’ve paid for.
So being able to make that choice at claim stage, and choose either the certainty of having a salary looked after, increasing with inflation or even faster than inflation, until I would’ve stopped working – or the ability to lump-sum and capitalise those and have the certainty of making that choice at claim stage – is an example of that new flexibility and a feature that, as far as we are aware, was sort of pioneered in South Africa and has really taken off in our environment.
SIMON BROWN: I take the point; I hadn’t thought of it that way. There might be different reasons and you might have different needs and not know what they are until you actually need to call on that policy.
You mentioned inflation. Man, I don’t know how much this is an issue now, but way back in the day – and we were going back 30-odd years – I remember a life policy which I think had a 10% annual increase, which at the time seemed okay. Fast forward 30 years and man, that policy has just become absolutely unaffordable.
CLYDE PARSONS: You’re quite right, Simon. It’s probably one of the most topical elements and components in the life insurance space at the moment. Brightrock intermediates through independent financial advisors who can sell any product, and we are always engaging on the ground with those advisors. Anecdotally, [from] the feedback we’re getting at the moment, as you say, those historic aggressive funding patterns are probably the biggest challenge to the life insurance space at the moment.
Brightrock is fortunately, coincidentally or deliberately very well poised in that space, and we can talk about that. But it is unfortunately one of the biggest challenges we’re facing. Globally we are facing a cost-of-living crisis. I don’t have to tell you – everybody is squeezed on every level. And if you’ve got, as you say, a premium increase of 10%, I don’t know about you, Simon, but my salary doesn’t increase by 10% every year.
And so that means, just as a share of wallets, the proportion that that life insurance policy is stripping out of your takeaway spend is increasing at an unsustainable rate. It’s just not feasible. As you say, you compound that over a number of years and the net effect is unfortunately when you need life insurance the most, you actually can’t afford it. So that unsustainability is a massive problem, and we are very fortunate in that from the inception of Brightrock it was one of the fundamentals we wanted to address and do differently and change the way the market worked.
SIMON BROWN: And then to your point, I don’t know if I’ve ever had a 10% salary increase. Is that just sort of making it inflation-adjusted? Is there even perhaps more flexibility around that?
CLYDE PARSONS: Historically, one of the only levers you’ve got to make insurance affordable on day one is to make it increase more later on; in other words, pay later. So it’s disconnected a little bit from the inflationary effect; it’s more from the trade off between initial affordability and long-term sustainability.
SIMON BROWN: Clyde Parsons, Brightrock chief innovation officer, I appreciate the time.
This article is a transcript of an episode of the MoneywebNOW
Podcast and was originally published on Money Web on 5 August 2024. The podcast is hosted by investor and columnist, Simon Brown. Read the original version here.
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