Life's rich pageant
With life insurance one of the most commonly bought protection products in the UK, Kevin Carr, chief executive of Protection Review, takes a look at the pros and cons of 10 different types
Not everyone needs life insurance. Nevertheless, it is one of the most commonly bought protection products in the UK with more than 800,000 policies sold last year – or 1.2m if one includes life cover plans where critical illness cover was added.
The UK offers some of the lowest-cost life insurance in the world although sales of life insurance are falling. According to Swiss Re’s annual ‘Term and Health Watch’ report sales of term assurance fell by 17% last year, while whole-of-life sales fell by 20%, which may partly be down to price increases limiting the opportunity to switch or rebroke cover to save money.
Since ‘G-day’ hit 18 months ago, whether or not people benefited from the price changes may depend on their gender. According to information from IRESS, average life insurance premiums for males have fallen by around 10% on average since gender neutrality came into force but rates for females, on the other hand, have increased by around 25%.
Whether or not a client needs life cover is a subjective matter. Even if they do not need it right now, they may well need it in the future when life changes and buying it now while young and healthy – and thus cover is much cheaper – may be worth considering.
As the Money Advice Service website rightly points out: “If you’re young – or even not so young but still healthy – life insurance is very good value. Often just a few pence a day is all you need to provide your loved ones with plenty of financial protection. But premiums do vary, so it’s a good idea to shop around.”
The concept of buying something you do not yet need – and in fact may never need – is a tricky one, especially from a regulatory point of view, although it is exactly what I did myself. If explained properly, there should be no risk of overselling or, dare I say, even mis-selling.
Put simply, the need for life insurance cover often boils down to two factors – debts and dependants. If a client’s children, partner or other relatives depend on someone’s income to cover the bills and the cost of living, then life cover and other protection insurance should always be considered.
Comparing products however is not as simple as it once might have been. Commenting on the difficulties advisers can face when comparing products, Adam Higgs, head of research for adviser services at F&TRC, says: “Even just for life insurance there are hundreds of options for advisers to consider when recommending a provider.
“People often say life cover is a vanilla product where all insurers are the same but when you look at the detail this is not the case. Areas such as flexibility, plan options, counselling and free cover are potentially important, as are operational issues such as tele-underwriting and back-office integration. Being able to compare insurers quickly and accurately on a wide range of factors is becoming more important than ever.”
That being the case, let’s take a look at the pros and cons of 10 different types of life insurance.
1. Level term assurance (LTA)
This is the most common type of life insurance bought in the UK and is typically used for family and/or mortgage protection. A term and an amount of cover are chosen, which stay the same until a claim is made or the policy ends. Premiums would also typically remain fixed during the policy term. Even though most mortgages are taken out on a repayment basis – with the debt decreasing over time – many people like the idea of the safety net of the additional cover LTA provides since the debt effectively reduces over time.
2. Mortgage protection assurance (MPA)
As with LTA, this type of policy has a specific amount of cover along with a set term. Should a claim arise during the term, the appropriate amount is paid out or the policy expires. MPA is approximately a third cheaper than LTA as the amount of cover reduces as the mortgage is paid off. If mortgage protection is chosen for a family, separate cover for the family’s need should often also be considered.
3. Decreasing term assurance (DTA)
Technically a true DTA plan is slightly different from MPA in that it reduces at a fixed amount – say 5% – each year, whereas a mortgage protection plan decreases in line with a typical repayment mortgage.
4. Family income benefit (FIB)
Perhaps the most underrated of all protection products, this plan pays a tax-free income instead of a lump sum. Premiums are comparably low as claims could occur towards the final years of a policy, meaning just a few years of income are paid. However, should a claim arise early, when the money is really needed, the policy can be incredibly good value for money, especially with families where dependants may suffer financially if the sole breadwinner dies. Family income benefit is a massively underutilised and undervalued contract,” notes Mike Aldridge, sales director at London & Country. “It is a very cost-effective type of cover that most people simply do not know about.”
5. Whole of life (WOL)
As the name suggests, these plans run for the whole of someone’s life and pay out no matter when they die. For this reason they are also typically much more expensive than term assurance policies. Traditional WOL policies are usually recommended to people with large estates who want to plan for inheritance tax when they die, often on a joint-life, second-death basis.
“Whole-of-life plans can be very good for inheritance tax planning,” says Chris McNab, protection manager at LV=. “Non-investment linked WOL policies are a welcome introduction to the market as previously most policies combined protection and investment, which were not always cost-effective, especially in the latter years of a policy. With the number of estates liable for inheritance tax set to rise by 66% in two years, this is an important area to consider.”
6. Relevant life
Relevant life policies are stand-alone ‘single life’ plans that are potentially suitable for any employee. In short, they are an alternative way for employers to provide death-in-service benefits to an employee outside of a group life scheme.
High-earning employees who have substantial pension funds and do not want their death-in-service benefits to form part of their lifetime allowance may benefit the most, along with small businesses that do not have sufficient eligible employees to warrant a group life scheme. The are certain qualifying rules, however, and premiums can be as much as 40% or 50% lower than the equivalent individual policy.
In addition, benefits do not form part of the employee’s lifetime pension allowance; payments made will not form part of the employee’s annual allowance; payments employers make are not subject to income tax because they are not normally assessable on the employee as a benefit in kind; payments can be treated as an allowable expense for the employer in calculating their tax liability, as long as the local inspector of taxes is satisfied they qualify under the ‘wholly and exclusively’ rules; and in most cases the benefits are paid free of inheritance tax – provided they are payable through a discretionary trust.
“Relevant life is one of the key growth areas for protection advisers at the moment, having opened up the market for small to medium-sized businesses to offer costs-effective life cover to their employees,” says Phil Jeynes, head of account development at PruProtect. “We recently added our unique Vitality healthy living programme onto our relevant life cover, meaning owners of small business can offer a ‘mini’ employee benefits package to their staff, incorporating not only the tax-efficient life cover, but also discounted gym memberships, health screenings and all the other benefits Vitality offers. In a market where new markets are hard to come by, relevant life is worthy of serious consideration by all intermediaries.”
7. Gift inter vivos (GIV)
GIV policies pay a lump sum if the person dies within seven years. The plan is specifically designed to cover the liability to inheritance tax on a ‘potentially exempt transfer’ that is over the nil rate band for inheritance tax. The amount of cover decreases in line with the inheritance tax liability over the seven years from 100% down through 80%, 60%, 40%, 20% and eventually zero.
8. Over-50s plans
Picture the scene – you are working from home one day with the TV on and up pops Parky offering you a free gift when you apply, to be followed by the carriage clock, DVD player and more. Over-50s plans have been a bit of success story in recent years and sales have been considerably higher than traditional whole-of-life plans. They offer simplicity, privacy and no medicals. But their value is sometimes open to debate.
“There seems to be a mind-set shift in the market as simple, pure protection products are moving away from being low-value and low-integrity towards being an important part of offering a range of products that suit customer needs,” says Maria Harris, sales director at Engage Mutual.
“The whole-of-life market has traditionally been more direct to consumer but, as advisers have diversified their models and looked at ways to embed value in their businesses, we have seen an increase in demand from this area. Guaranteed acceptance plans now account for 89% of all new whole-of-life sales.”
Adds London & Country’s Aldridge: “Over-50s plans, like funeral plans, can be fantastic for impaired lives and clients who fit the right profile. Guaranteed acceptance can be a huge draw for some people – however, significant downsides can include the cost as well as restrictions on claims in the early years.”
9. Death in service
Death in service pays out a lump sum if someone dies while working for their company. Just check to make sure the benefits are enough to cover their family’s needs – if it’s not enough, they can top up with a life insurance policy. But do bear in mind that if they stop working for that employer – perhaps through ill health – they may lose the death in service benefits and may not be able to take out life insurance at that time.
10. Real life cover
Back In 2008, protection intermediary LifeSearch teamed up with Ageas Protect (then Fortis) to launch a new type of protection policy that combined the core elements of life cover, critical illness and income protection within one basic policy. The premise was relatively simple – just choose a total amount of cover and a term. If someone chose £100,000, say, then they had £100,000 of ring-fenced life cover plus £100,000 of critical illness and income protection combined, based on an eight-year income protection plan, and a small lump sum if it was one of the four main critical illnesses. The product is still available through LifeSearch.
Kevin Carr is chief executive of Protection Review and managing director of Carr Consulting and Communications