As we become a more digitally enabled society, inevitably advisers are being pitted against online aggregators and life providers for their protection clients. Online and direct channels offer a quick and slick process for effecting life insurance. They can also offer products at a discounted price. Many aggregators or life providers will be happy to make a loss on their protection sale for the long-term benefit of gaining that customer. They’ll have many different products and services that they’ll seek to up and cross sell in the future.
So how do advisers compete? The answer to me is obvious: by demonstrating the value of their advice, and there’s a multitude of opportunities to do this. Advisers can place policies into trust for their clients. They can tailor a protection solution to a client’s exact needs. But a very simple way to demonstrate their value is to advocate that a client chooses an increasing (or indexation) option for their term assurance solution.
There are a couple of really obvious but important benefits of indexation that have the ability to greatly improve customer outcomes, but before I get on to these it’s worth giving some background on how indexation works in practice. Almost all providers offer this option on their level term assurance products, and some will allow clients to choose either a fixed interest rate – typically between 1 and 5% – or a rate linked to the retail price index (RPI).
For lump sum covers (life and critical illness), the price of the cover on day 1 will be the same for level and increasing cover. Then on the policy anniversary, the customer will be notified of the planned increase to their sum assured, and the impact on the monthly premium. At this stage, they can either do nothing and allow the increase to automatically go ahead, or they can decline the increase. The increasing option will usually be withdrawn if a customer declines for two or three consecutive years depending on which provider they are with.
The increase in premium shouldn’t be confused with reviewable premiums. And neither should it be confused with the type of annual renewal you tend to get for the likes of car and pet insurance. For these policies, often your cover remains the same, yet you’re asked to pay a higher premium. For term assurance, the premium only goes up if you decide that you want your sum assured to increase.
The first big advantage of an indexation option is the ability to inflation proof a client’s sum assured. Deciding on the value of a client’s life or critical illness sum assured can be a tricky business. Very often this is constrained by budget. There’s no magic formula, and most people in the UK are under-insured. For personal protection, ideally the sum assured should be enough to make sure that a family’s lifestyle can be maintained should the worst happen. Often advisers will calculate what the level of cover required today would be to preserve that lifestyle. However, no adviser can predict how the economy will develop over the next 30 years.
What’s generally accepted however, is that over time, inflation will erode the value of a sum assured. So in real terms, level term assurance over time actually decreases in terms of what it has the potential to provide. If a client took out a £100k sum assured level term life policy today, any claim payout in the early years would be able to buy more goods/services than in 20 or 30 years’ time. For example if an adviser decided 20 years ago that a family needed £100k for personal protection, then today, as a result of price inflation, that family would need £173k to buy the same amount of goods/services.1
It’s difficult to predict inflation levels, which is why aligning to the RPI is effective. What’s also difficult is predicting whether a client’s protection needs will grow or decline over this period. You don’t know if the family or number of dependants will increase, whether they’ll be successful in their careers, or if they will inherit wealth. But surely having the option of keeping the real value of their life insurance preserved is something most people would value.
It may be that some advisers will commit to annually reviewing a clients protection needs, but in practice how often does that happen. What if the adviser retires, or the clients moves away? If a client fails to seek advice for a significant period of time, then at least the indexation option will continue to serve as a reminder of their existing protection and give them the option to increase.
Finally, when it comes to critical illness cover, many advisers realise that protecting the full mortgage is unlikely due to budget constraints. A common strategy is to recommend that their clients take out a sum assured equivalent to 6 - 12 months net pay to provide a safety net should the worst happen. If this level of cover is to remain relevant, then indexing surely should be the default. Many of us will expect that over the next 20 to 30 years that our earnings will increase, therefore our protection levels should keep in touch with this.
An area where advisers can truly differentiate, is by recommending a product or solution that meets a clients needs today, but is also likely to serve their client well in the future.
Product providers will underwrite their customers at outset, so each annual increase offered to the client will be free of underwriting. If you’re accepted on standard terms, then each increase will be offered on the same basis. The impact of this can be of huge benefit for some customers.
If a person has life cover and are unlucky enough to be diagnosed with a critical illness, it’s unlikely they could ever get standard terms protection again. However, if they have an increasing option on their life cover, they still have the opportunity to increase their cover at the same rates regardless of health. This could save your clients a significant amount of money. And it also gives them the option of increasing cover, which they may not be able to get at a later date as a result of their health.
I’m pretty certain that if you offered a client who had recently suffered a critical illness, the option to increase their life cover on standard rates, they would bite your hand off. They probably have a much-heightened understanding of their mortality, and like most of us are probably under insured.
Making indexation the default for protection
In summary, I believe that there are enough strong justifications for almost always index-linking a client’s term assurance. So much so, I believe it really should be the default for all family protection. Rather than an adviser having to justify why they’ve recommended indexation, I feel the onus should be on justifying why they haven’t. Especially given clients will always have the opportunity to decline any increase to their protection policy.
What’s more, by recommending indexation advisers are proving the value of their advice. It’s extremely unlikely that a customer would get any advice on indexation by self-serving, either directly with a provider or through an aggregator. This therefore creates an opportunity for advisers to differentiate their service and ensure their clients understand why seeking financial advice is so important and so valuable.