It's changing times for the critical illness market - undoubtedly the most significant since this product was launched. The changes are being driven by advances in medical science and the claims experience of providers. Ultimately, the prevailing trends are likely to result in a new shape of product emerging in the medium to long term. In the short term however, the focus is on guaranteed rates versus reviewable rates.
The reality is that sooner rather than later guaranteed rates will disappear altogether, or become too prohibitively expensive to represent a viable option for many clients. No doubt that we are likely to see a major change to the shape and structure of critical illness products as we currently know them. However the industry is not yet clear on what this product development should look like.
In the meantime, it is worthwhile highlighting what IFAs should look for when recommending reviewable rates.
First of all, let's be clear that IFAs can make critical illness premiums more affordable for their clients in the short term by recommending reviewable rates instead of guaranteed rates. There is no doubt that reviewable premiums are cheaper in the short term. The differential between reviewable and guaranteed premiums is ever increasing, with many cases seeing a gap of upwards of 30%. This can be particularly significant to the client choosing to take out protection or not, particularly where a client has a restricted budget, such as a first time house buyer.
Reviewable rates are fixed for different periods with different providers. Some reviewable rates can be revised at any time. Among the most attractive options are five year reviewable rates which are fixed for five years and then reviewed, and then fixed for another five years, and so on. This enables the IFA to establish a greater expectation management with the client. It could also act as a catalyst for a regular financial health check with the client.
With reviewable rates there is no further need for underwriting after the initial application. The review is linked to the market at that time and not to the medical health of the client. In the future, if critical illness is to change, providers must ensure that critical illness cover maintains affordability and appropriateness. We must not allow the product to become so expensive as to exclude vast sections of the population from taking out cover. As consumer debt in the UK keeps rising, it is more important than ever before to address the "protection gap" which affects the population.
The overriding concern is that of IFA and client confidence – in the provider company, and in the protection industry as a whole, that the product they are buying will offer genuine value for money cover and will pay the expected benefit should critical illness arise.
Making sure that consumers understand the nature of the product they are buying is paramount for all parties to eliminate the potential for disappointment should a claim arise. It is important to acknowledge the pivotal role that the IFA can play in this. The protection market has entered an important new growth phase and we must avoid over complicating products going forward.
These are all future prospects. In the meantime, reviewable rates can represent an attractive alternative to rising guaranteed critical illness premiums.
Laura Shanks is product marketing manager at Scottish Equitable ProtectIFAonline
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