CLEAN-SKIN today, vintage tomorrow

I know what you are thinking, why is a financial planner writing about wine. Though I do like the adventure of finding a great bottle of wine for a fraction of the price through trial and error, that is not what I am writing about today. Anyone who has been though the process of setting up good quality insurance cover will know very well what this is about. Most people would not react well to someone you don't know asking you very personal questions, as it is none of their business. This blog aims to help illustrate why insurers ask these kind of questions and explain that they are not just "being nosy". 

Background

Unlike private health insurance in Australia, where there is no discrimination on whether you are young and healthy or older and unhealthy, life insurance and its associated products such as income protection etc is based on the simple idea that people pool their money to protect against financial loss.  If something bad should happen to you, the insurance company steps in and helps you or your family pay the bills and help you through what is usually tough time. 

What is a clean-skin?

The term "clean-skin" is used in the insurance industry to describe someone who has no health or financial issues and essentially "ticks all the boxes". Put simply, insurance companies are not charities. They base their premiums on projecting how many people will claim. In order to do this they use a meta analysis of sorts that combines data from multiple sources including their own experience and larger sources such as the bureau of statistics. It is important that they get this right as life insurance contracts are often held for a long time and nobody likes a premium increase, especially a large one.

If an application is made that indicates that this person might be more likely than most to make a claim an underwriter has the option of a "loading" (increase premium to match the additional risk) "exclude" (not cover the specific condition or risk) or "decline" (no cover offered). A "clean-skin" has had no medical concerns, works in a job that has a predictable risk and doesn't go base jumping on weekends. More often that not, an application made by a clean skin involves little or no fuss and is approved immediately. 

Why you don't get better with age

It has been said that age 30 is your "peak" in terms having the brain processing power that you had at age 18, coupled with enough experience to use it well. Whether this is true or not it is quite common that after age 30 things start to change with our health. This could be simply wear and tear on joints (you cant quite make that jump shot like you used to) or a change in diet and long hours at work. In my experience people usually start looking after themselves a little better around this time as they realise they cant continue the lifestyle they did in their 20's without paying the price (that couple of bottles of vino shared with a friend at dinner does slow you down the next day now). It is also the time that you invest more into looking after yourself, which might involve a yearly check up at your GP.

Where previously you would only see the family doctor if you needed something specific, now you might find yourself at your local medical centre for relatively minor things such as a renewed prescription. A good GP will help keep you on track to a long and healthy life. Sometimes the harsh reality could be that you are a little too heavy and your family and friends don't have the heart to tell you, it could also be that they spot something a little off that could be easily rectified. For example, in Australia we spend a lot of time in the sun and consequently we have one of the highest rates of skin cancer in the world. The majority of these cancers are very simple to treat as long as they are not left too long and many can be dealt with right there and then depending on your doctor's speciality.  

Any investigation that a doctor or specialist might conduct goes onto a medical record and helps the insurer decide what premium you might pay based on your likelihood of a claim.  They ask these questions during the application process and if they feel that further investigation is required, they might request this medical report or ask for an updated test to ensure that they can price you accordingly. 

So when is the right time to get covered? I don't want to pay for insurance that I might not need for 10 years!

In the majority of people's lives there comes a time when you need some type of insurance as you have a family and/or debts and want to ensure you keep earning an income to cover these, even if you cant work.  The majority of clean-skins do not have these concerns as they are still studying or just started work and really have no major financial commitments. What they do have is a lifetime of earning potential.

Based on the current average Australian wage ($81,947), without any increases, if a 25 year old worked to age 60 they would earn over $2.8 Million dollars. Once you start applying pay raises and CPI increases this number becomes even more impressive, and that's if you actually want to retire at 60, many don't. So lets assume this 25 year old is working in an office, is fit as fiddle, does not smoke, and has not a care in the world (other than the boss asking for this month's TPS report before it is even due). For illustrations sake, lets say he covers his income and some of his potential future income of $1mil. He could cover this at just $193pm not bad right, probably less than his car insurance and if he has to take more than a month off work he would still be able to pay his rent and other bills without going back to the bank of mum and dad and if he were unable to work at all would have an additional $1mil on top of 75% of his income until he reaches age 65.  If he were 10 years older the same cover would be roughly twice the price. 

Now this is where a skilled risk adviser really makes a difference (yes i'm going to get technical/nerdy now). Most quality insurers will offer a level premium that essentially "locks in" today's premium so it does not increase as you age. The average age a person makes a significant claim due to poor health is age 51 so lets say you had a crystal ball and knew this was when you would make a claim and were fit and healthy up to the year beforehand, at age 50. Covering the same amount would cost you $863pm, almost 8 times the cost. The truth is that nobody has a crystal ball and not many people have and this kind of money spare in their budget as this would mean around 10% of your income at the time. If he had chosen a level premium at age 25, this would be just under $300pm and would continue to be pretty much the same (adjusted for inflation) to age 65, when the initially cheaper option would skyrocket to $5,761pm no that is not a typo. So at the time when you are most likely to claim, you are paying roughly 1/20th of the premium. 

I am not saying that you should rush out and get yourselves all the cover you can right now while you are fit and healthy. Getting a good quality "base line" of cover that can be expanded upon through features such as "Guaranteed future insurability" which lets you increase cover when you get a promotion, buy a house or have children (with no medicals) and the like can help future proof against developments in your health and helps you plan for the future. If you do fancy walking through these options, this is my speciality and I do this with every single client I meet. 

Shaun Clements

27 July 2017