Loyalty point schemes can offer exciting and lucrative rewards – simply for spending money you were going to spend anyway. However, there are traps for the unwary, and you should use care when deciding to take any action simply to gain more points.
Loyalty Point Schemes – benefits
Too many times financial types (like me) prattle on about the woes of this or that way of spending money, without highlighting the potential positive outcomes. So I’m going to be positive today, and confirm that I actually like loyalty point schemes.
Saving money is great!
It’s great to receive a discount or a reward simply for paying the usual bills you have to pay. Getting a discount for petrol is fantastic – especially if you own a Landcruiser! Add in a bit of care in selecting where you fill up, and suddenly you are talking about real money savings. Similarly, spending money on your weekly food bill and using a credit card to do so, can be a great way of accumulating points. Obviously, it’s best to make sure you aren’t paying credit card rates of interest and clearing your account each month but that is old news that i won’t bother you with.
Loyalty Point Schemes – Pitfalls
Yes, this is the real point of this post. I just wanted to be a wee bit positive before I dumped negative thoughts on your day.
From time-to-time clients send me questions or thoughts on this or that financial matter. Recently, I’ve received a number of questions relating to loyalty point schemes and reward schemes. It seems that some of these schemes are on a bit of a marketing drive, and are peppering their client base with thoughts and ideas on ways to accumulate more points. All of which is fantastic, if your current expenditure/lifestyle already dovetails with the offers then you are getting rewards or discounts virtually for free! Yay!
The financial services regulator, ASIC, operates a website full of helpful information and links. There is even a page on loyalty schemes that can be found here.
Loyalty point scheme – total costs
A few of the questions I received related to offers for insurance cover. Now this is where loyalty point schemes move out of my comfort zone, as most people approach insurances very differently to their other ongoing costs. It is also a very difficult area to assess quickly – which makes direct insurance offers an area in which you should exercise much higher-than-normal levels of care. If the offer of a loyalty point scheme is in the form of points for insurance cover, you need to make sure you are looking at the total cost and the total cover before you make any decisions. Here’s an example..
Loyalty point schemes – insurance
To answer my clients’ queries on loyalty points schemes and insurance, I set up a “standard” person and sought quotes on an average level of cover. Here’s one example that I worked on last week:
- $500,000 life insurance cover
- $375,000 total and permanent disablement cover
- $100,000 “Trauma” or critical illness cover
- $8,812 per month of income protection cover (with a “benefit period” of 5 years if a claim was to be payable).
For simplicity, I used my own demographic – a male, non-smoking white-collar worker aged 54.
The premium quote for this cover was $1,245.54 per month. If I were to take out this cover then I would receive a huge amount of loyalty points. Much more than I could earn in a year with my usual spending patterns. It’s a very attractive offer – I can bring my insurances up-to-date (which most people rarely do), AND I can earn a bucket of loyalty points to use for vouchers or gifts or travel.
But there’s a catch..
The premium I could obtain that same cover for by using a standard insurance company via a financial planner or insurance adviser was … $793.93 per month.
That difference of $451 each month is not just statistically material – IT IS HUGE! $5,412 a year for possibly a lot of years. That’s a good holiday lost every year in excessive insurance premiums.
Very (very) broadly speaking 100,000 loyalty scheme points would be worth about $500 if cashed in for gift vouchers (more or less depending on the scheme and the redeeming company but even if it were $1,000 then you can see the issue here..). Why would you spend over $5,000 a year for a $500 reward?
If you are surprised at the difference, I am just as surprised! The usual *advantage* of direct insurance offers is that they do not pay commissions, which is supposed to make it cheaper for you. Yet the direct insurance schemes I have reviewed in recent times were not cheaper than equivalent insurance offered by companies that paid insurance advisers commissions. So this is clearly an area in which a lot of research should take place before decisions are made.
Be careful of the true cost of loyalty point schemes!
In this case, the insurance cover on offer was ok – not great but ok. The underlying insurance company is strong and offers quite good coverage in their policies issued through financial planners and insurance advisers. BUT the total cost of obtaining a relatively small financial reward is loyalty points is completely overwhelmed by the excessive ongoing costs of the insurance.
The Great Disclaimer
As always, please remember the Great Disclaimer – nothing in this post or on this site is to be taken to be personal financial advice. It is general advice only and does not take into account your personal circumstances or financial situation. As an example – you could be in the “sweet spot” of the loyalty point scheme insurance demographics – and if this were the case then perhaps your insurance cover and cost with the loyalty scheme insurance could be quite competitive, or even compelling. Yet the disclaimer remains for me as for any financial advice – use caution, and do not make long term large financial commitments solely to obtain some incidental benefit.
The loyalty scheme in question doesn’t really matter, nor does the insurance company. The key point of my note is that it is important to compare total costs when looking at making purchases and obtaining loyalty points for those purchases.
If that is not clear enough, here are a few more points on disclaimers for your enjoyment and edification..