Look before you leap into 'upgrades' that may aid adviser more than you

Here's a starter for 10: your insurance adviser recommends you "upgrade" to "better" life/health-related cover. He (or she) has a whole host of seemingly logical reasons for doing this. Should you?

The answer is that you're entering dangerous territory. There are plenty of registered financial advisers (commission salespeople) in New Zealand who will give you advice that's in your own best interest.

The Financial Markets Authority (FMA), however, has identified a rather too large chunk of these advisers who appear to have been shopping clients from insurer to insurer every two years to get extra bites at the commission cherry. Of the 1000 top selling insurance advisers in the country, the FMA used data to find that up to 200 appeared to have questionable sales practices.

If an adviser says to you that you need to upgrade your life/health/income protection/mortgage protection/critical illness or other related insurances because there's a "better policy" available, you look before you leap. There are dangerous pitfalls for the unwary.

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For an independent answer to the question of whether policies are really improving as fast as all the rewrites of customer policies suggest, I phoned Quotemonster, a search-engine service that advisers use to compare policies.

Quotemonster chief executive Russell Hutchinson says policies do change a lot, averaging about 10 product changes per quarter for the past three years. Hutchinson supplied me with a list of changes, which do sound beneficial.

Conor Sligo, general manager at LifeDirect, says, however, that many of these changes are simply tweaks by insurers to help their policies score better against rivals on comparison engines, rather than providing clients with more valuable cover first and foremost. This also gives advisers "better policies" to sell and earn commission on.

For many clients the sign of a good adviser, says Sligo, isn't the one who does a review and finds a policy with a few new tweaks. It's the one who reviews your existing policies and recommends that you stay where you are.

"Provided you disclose everything and are properly underwritten, and you know the terms of your new cover are satisfactory to you, there are, of course, valid reasons to switch, as Hutchinson points out. "You might, for example, change for all the reasons you change any other significant financial commitment -- such as your bank, your home loan, your investments, or your home -- because you get a better deal, you are sick of the company stuffing up, you want something only the new product provides, and so on; or the old product is too much and you need to downgrade."

The elephant in the room is your health. Nick Stanhope, Sovereign's chief executive, points out that switching health-related insurance is not like changing mobile provider, which you can do, back and forth, without losing anything.

If you've been to the doctor for even the most minor of problems, you could have the precursor of an illness that your existing policy will cover but a new one won't because it's a pre-existing medical condition. Even if the adviser manages to get your pre-existing conditions covered for an extra premium, there may well be a stand-down period. So effectively you're not covered for three or six months. Sometimes individuals and their advisers accidentally fail to declare a relevant medical event and void their cover in one fell swoop.

Part of the problem for the insured person is that advisers do not have a strict requirement to document their recommendations to show that they're giving "good" advice, although they must by law give advice with "care, diligence and skill". Interestingly, they don't have to put the client first and too many are putting their commission above what's in the client's interest. That sucks, but it is under review.

In a recent case heard by dispute resolution service Financial Services Complaints Ltd, an adviser convinced "Shane" to review his policies and surprise, surprise, recommended he get a "better policy" through another insurer.

Shane had some pre-existing medical conditions, but his adviser astoundingly forgot to mention this on the application form. It would seem from the case notes that Shane wasn't better off switching insurers, but his adviser was.

The dispute resolution services and the Insurance & Savings Ombudsman aren't allowed to name the guilty parties in cases such as this, which means the adviser can keep putting commission ahead of the customer's best interest because they're not being outed.

Stanhope says clients can make changes to their existing policy that can avoid some of the risks involved in changing providers. But it's important to check that pre-existing medical conditions are covered before switching. "In some cases it can be more cost-effective to maintain your old policy and take out 'top-up' insurance with the new company if your health circumstances have changed."

By selling a new policy, a broker can earn thousands of dollars in commission. If the client stays with the same insurer, the adviser usually only picks up a small amount of annual renewal commission.

Sligo says he is occasionally contacted by advisers who have done just this and want to take the policy over. But it's rare.

I was already beginning to feel that the sale of life-related insurances was out of control, when an adviser sidled up to me at a sports event to complain that I'd suggested in an earlier article that commission was an inappropriate way to sell insurance. I caught him off guard and he admitted that his hourly rate is $500-plus, which simply confirmed my suspicions. My doctor and accountant, who spent years studying, earn less.

One investment adviser emailed me last month, horrified that after a week's training, his brother was selling life-related insurance that had the power to make or break someone's financial future. He added that the sums of money the rogue insurance advisers were earning from their churning were "robbery and double dipping".

Advisers aren't the only ones to blame for the churning that happens. Insurers are driving this behaviour as well, offering ever greater commissions and rewards as well as tweaking their policies to encourage advisers to churn the customer base yet again.

Perhaps I've read too many ombudsman/dispute resolution services' case notes from insurance sales that went wrong. But my advice is that people should record the conversations they have with financial services industry staff, including bank staff. There are too many "he said, she said" arguments before dispute resolution services.