Is My Bank My Friend?

We tend to view our bank as a trustworthy, reliable ‘helper’ in our increasingly complex financial lives. But are they, really?

The crucial pivot in the relationship with the bank is our mortgage. It may seem like they’re doing us a huge favour – taking a big risk on our willingness and ability to repay the debt, doesn’t it? (Answer: not really…)

So, we tend to feel like it’s only fair to reciprocate and we put our Kiwisaver fund there, we insure our houses & cars there, and often we will take the bank life insurance offer.

This is usually at the point of taking or refinancing our mortgage. This is when the bank usually offers us their life insurance, and, even though it’s not openly stated that you must take their offer, it feels like we SHOULD take the offer from the kindly banker who is lending us this money (and possibly, in the back of our mind, thinking maybe they won’t lend if we don’t!).

It used to be that the bank facilitated the transfer of money between parties, held deposits & made loans. That was banking in its entirety.

But times have changed. We are now consumers of a wide range of financial products, and the bank has expanded the products it offers to capture as much of that consumption as possible. Its sole purpose is to maximise the profit it can generate from each of us by convincing us to use as many of its various services as possible. Insurance, both life & general, are significant profit centres for them, while our Kiwisaver account is enormously profitable to the bank over the very long period of time we hold them.

I recall my father saying “If I want a lawnmower, I wouldn’t go to a furniture store”. Sounds silly, but his point was this – it pays to go to an expert in what we want. If we want a lawnmower, go to a store that sells mainly lawnmowers (plus the usual side lines), but the key reason for buying our lawnmower from that specialist is that we can expect expertise, an ability to assess & meet our needs, and have someone to go back to if things go wrong and have it fixed.

The same applies to the most important personal financial products we will buy – life insurance & Kiwisaver.

Like many in retail services, bank employees are driven by sales targets, with bonuses, and are under some pressure to meet them or explain why they failed. This leads to some interesting behaviour.

I know of an instance when a customer was going to see a bank lending officer about a mortgage, and found that there was already a life & mortgage protection insurance quote already on the desk – this before the customer had even opened his mouth! No discussion about what might be needed, or what the customer already had in place…

Another example: one day in a major bank, I watched a young woman behind the counter, wearing a “Trainee” badge suggest to a middle-aged customer to switch her Kiwisaver. She then completed the paperwork for a transfer of an existing account. There was no advice, no information comparing this customer’s existing plan with the one replacing it. She could have moved the customer from a higher-performing, lower fee-based plan to a pile of expensive buffalo dung. The point is that neither of them – neither the customer nor the bank clerk – KNEW, one way or the other.

In such cases, we will be amply rewarded by finding and using an expert to provide us with advice – someone who will help us work out what we want & what we need, then find the most appropriate product for us.

At the bank, there’s only one brand on offer - theirs. Their products are not compared to any other options, so how do we know we’re getting what is most suitable for us? How does it sit on price as well? Are the benefits & definitions of the insurance plan “best of market” or are they pared down to minimise the possibility of a claim? And when we DO want to make a claim – who do we go to? If dealing directly with the insurer (bank), what do we do if they simply decline the claim? Who can take up the battle on our behalf?

I’ve been dealing with bank-insured clients for the last 20+ years, so I’ve seen them ‘up close and personal’. It’s often not pretty, and I’ve rescued most of them from situations like the one outlined below.

In a most recent case, a married couple with a young child were paying the bank $155 fortnightly, for insurance. The amount of life insurance cover was around a 3rd of what the survivor would need; there was a trauma/crisis benefit that was woefully inadequate in terms of the quantum of money that would be paid, and in the number of conditions that it would be paid on. (In fact, this Bank’s trauma/crisis cover rated a B- compared to the As & A+s of the 5 insurers I surveyed for them).

There was also an indemnity income policy that would not pay as much as he was insured for, and had only a 2 year payment period…begging the question, what happens when the benefit runs out and the Insured is still disabled?

But the real kicker was this – after a logical analysis of their needs and my advice, they decided to increase their life insurance by 200%, added a significantly better trauma/crisis benefit in both amount & definitions, added ‘to age 65’ income benefits to both parents and the price ended at $177 per fortnight – the increase mainly being due to the addition of the income benefit on the second parent.

The take-away from these experiences over the years is that the insurance & Kiwisaver plans offered by the bank channels is poorly (if at all) advised, with hap-hazard structuring in the benefits, under-spec’d in the definitions that apply when a claim comes round, and over-priced compared to what can be accessed through a Specialist Adviser.

So, while having insurance with the bank is significantly smarter than NOT having any insurance, if we are spending money on this crucial financial instrument, surely it’s even smarter to get some advice from a Specialist, with access to a wide range of providers, rather than be a captive of a one-flavour-only-it’s-vanilla provider and being served by an anonymous bank employee, who is more interested and working hard to reach her sales target for the week, than in what is RIGHT for the customer.

If you have your Kiwisaver with a bank, seek out an AFA who can give you the low-down on your plan compared to other options. Likewise, if you’ve got insurance through the bank, have it analysed by someone (like me!) who can provide advice & options!

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