If you look at the protection industry and how it has changed over the last 25 years, a lot has happened. Technology has firmly embedded itself into everything we do both in our professional and personal lives.
Social media, smart phones, the internet. All things we take for granted today but may not have existed at the start of your career (if you’re of a certain age). But have the main headline protection needs for clients ever actually changed? People still die prematurely or become ill during their working life. From a financial point of view, they still need to repay debts and maintain the lifestyle of themselves and their families should the worst happen. These fundamental protection needs haven’t changed.
A long standing belief of mine has always been that when it comes to protection, the general public would achieve far better outcomes by taking proper financial advice as opposed to doing it themselves.
People typically don’t understand the nuances between products and underwriting. They don’t know how to properly assess and evaluate the risks they are exposed to. When they buy protection products without financial advice, they don’t cover all their bases. Many don’t even want to contemplate the possibility of bad things happening in the future and would rather just leave it to chance.
91% said they don't need to think about protecting their income1
In the most recent version of Royal London’s state of the protection nation survey only 9% of people with no cover believed they needed income protection1. That means 91% said they don't need to think about protecting their income. 52% also admitted that they would last less than six months financially, if they couldn’t work due to illness or injury1. These statistics show people are aware of potential financial difficulties but don’t think it will happen to them.
Life cover tends to be less expensive than critical illness cover or income protection because you’re less likely to claim. There is a greater chance you will suffer an accident, incapacity, go off work sick, or even suffer a serious or critical illness during your working lifetime, than you are to die2. It’s strange that when you look at the total number of protection sales for each product group, they’re directly at odds with the reality of people making claims. According to Swiss Re, more than 1.5 million term life policies were taken out in 2018. And just under 150,000 income protection policies were bought3.
In a horse race such as the Grand National you would expect the higher volume of bets to be placed on the horses which have the greatest odds. A horse with a greater expected chance of winning is a more attractive proposition and people placing bets think there is more chance they will win. It’s strange that this isn’t the same in financial services.
There is a process which financial planners follow for investment decisions and I believe there is some common ground that mortgage and protection advisers could follow.
For advisers to give advice about investments, they need to have a conversation with their clients about their attitude to investment risks. Usually they will use an ATR profile tool which helps them understand their clients risk profile. That process is subjective because it’s about how the client feels to certain scenarios posed by the profile tool. Advisers must also ascertain the client’s capacity for loss. This process is objective because it’s based on the reality of the client’s ability to absorb falls in the value of their investment or the amount of loss that they can afford to bear.
The Financial Advice Market Review (FAMR) said “If any loss of capital would have a materially detrimental effect on their standard of living, this should be taken into account in assessing the risk that they are able to take4.” Shouldn’t a similar process exist for protection?
Should the worst happen, it could be financial devastation for that family.
Imagine you have a client with dependents who has minimal or no protection arrangements in place. What would an “attitude to protection risk” profile look like for that client? We might categorise them as being “adventurous” or “high risk”. But what would that clients “capacity for loss” be? Should the worst happen, it could be financial devastation for that family.
Risk profile tools now exist where advisers can quickly create reports which show the likelihood of a protection claim within their lifetime, for example, Royal London’s risk summary report. This can be a great starting point to have these conversations.
Financial advice is not only based on the client priorities, attitudes, opinions and budget, but also based on the opinions, experiences, and beliefs of the adviser. Advisers have the job of interpreting client priorities and making suitable recommendations based on their knowledge of the market, availability of useful and appropriate product features as well as underwriting and many other factors.
Almost all clients have a ceiling as to how much money they can spend on protection. The tricky question is what’s the best way of making use of the available budget?
What’s the best way of making use of the available budget?
For example, a couple of first-time buyers in their early 30s agree to a protection meeting following the arrangement of their new mortgage. They don’t have any protection cover in place, but they are happy to spend around £80 a month. What's the best course of action?
Clients are most likely to take life cover with their mortgage but if the budget allows, it could also include critical illness cover. This solution means the mortgage can be fully repaid in the event of death or critical illness. Beyond that though, there could be other gaps. What about additional life cover to help the family maintain their lifestyle? What about cover to replace income in the event of sickness or incapacity?
The idea of protection portfolios is simply to appreciate that clients have risks in various areas. Some of these areas are against debts like mortgages. Others are against the ability to maintain their lifestyle and standard of living. If you can’t provide your client with a perfect protection solution, surely some cover is better than none.
Income protection is a good example of a product which can be potentially very expensive for certain clients if you apply all the maximums available. The longest term, shortest deferred period, longest payment period, maximum amount of cover based on the client’s income...
What if the client can’t afford the Rolls Royce solution?
What if the client can’t afford the Rolls Royce solution? Can we still provide some cover by making a few justifiable compromises to the amount of cover recommended? Is recommending an amount of cover that means the client can pay their essential monthly bills each month a good idea? What about using a shorter payment period – say 5 years? How about setting the policy term to the age the client intends to retire?
These changes will significantly bring the cost down whilst still providing valuable cover.
Portals and comparison sites will help you design sophisticated protection portfolio solutions which aim to meet multiple client needs. The other benefit of recommending multiple protection solutions is that many life companies have plan charges on individual protection covers. By creating a portfolio (or menu) of several different covers within the same plan, some providers only charge one plan fee. This means the client will see savings on their premium and could be used to enhance their protection cover further.
When it comes to giving financial advice, what do you believe is best? Do you believe in spreading the risk? Is some cover better than none? What is the best value for money when you don’t know what claim could be made in the future?
If clients have a clear understanding of the protection risks, they’ll make better and more informed decisions about what their priorities are. For you, the adviser, it will help deliver a broader protection solution that offers greater value for money.
Read more about Royal London’s tailored menu plan or speak to your usual Royal London contact.
1 - State of the Protection Nation research, Royal London, March 2019. 2,005 people asked, results weighted to nationally representative criteria.
2 - Institute and faculty of Actuaries' Continuous Mortality Investigation Income Protection Committee Working Paper 124, September 2019.
3 - Swiss Re, Term & Health Watch 2019.
4 - Financial Advice Market Review (FAMR), Financial Conduct Authority, April 2017.