Traditionally a niche area for wealthy individuals, a recent shake-up in the whole-of-life market suggests this is set to change. Scottish Provident's Jennifer Gilchrist explains.
The Retail Distribution Review (RDR) has finally descended upon us. We are now operating in a whole new world and advisers face the stark reality that, for pensions and investment business, commission is a thing of the past.
With the focus now on fees, it is anticipated that more advisers will enter the protection market and this could create a much needed boost to the industry. With the potential to raise more awareness around the value and importance of protection, we could see, not just an increase in sales, but also peace of mind and security for even more clients.
For holistic financial protection planning, the term market is well established, providing mortgage, family and business protection. However, the whole-of-life market (let’s ignore funeral and over 50s plans) has, in the past, been seen as a niche area, providing inheritance tax planning for wealthy individuals. That’s all set to change.
Protection shake up creates whole-of-life options
During the last six months of 2012 the whole-of-life market went through a bit of a makeover with the old traditional unit linked products all but vanishing from our shelves. Non-profit whole-of-life plans have been the winners, with new products and new providers entering the market.
New business volumes have increased, which is great news for a market that has been stagnant or in decline for some time.
Using whole-of-life for inheritance tax planning is still relevant but there are many more areas of financial planning and customer needs that can be supported by a whole-of-life product.
The most obvious opportunity is to use the product for clients who simply want to be sure of passing on some money to their next of kin. However, they might not be in a position to do so unless they commit to making regular payments for the purpose. Many people now rely on their homes as a pension in their old age.
They might find themselves in a situation where there is little money left to pass on once they have significantly downsized their property or taken out an equity release plan. However, using a whole-of-life plan can enable them to ring-fence money specifically for the benefit of their heirs.
Those planning to leave the family home as an inheritance to the children have the added risk that they may be forced to sell their home to pay for nursing care later in life. In 2009, a survey found that 48,000 people currently living in care homes were forced to sell their homes to pay for care costs (Liberal Democrats research).
At the moment, people with assets of more than £23,250 are deemed self-funders and are therefore required to pay the majority of the cost themselves. It would be awful for parents to see everything they had worked so hard for and hoped to pass on to their children disappear.
Taking out a whole-of-life plan earlier in life written under trust could replace all the lost inheritance that care fees could take away. The house would still have to be sold and care fees still paid but at least there would be an inheritance for the children after their parents had passed away.
These do not have to be the only reasons for recommending a whole-of-life plan. If clients are going to derive maximum value from their protection plans then it might be best to start thinking in terms of multi-usage.
For example, a whole-of-life plan can be used in the first instance to protect a client’s mortgage but, once the mortgage has been paid off, it could be used to take care of the childrens’ inheritances. If, by that stage, the client has become short of money they could even get the children to continue paying the premiums.
Similarly, whole-of-life plans can be used for a range of business protection purposes such as loan protection, shareholder protection or keyperson cover. They have built-in flexibility to allow cover levels to be adjusted in response to business events via guaranteed insurability options.
So, a business owner could take one out initially to protect their business, flexi it as the business grows and, once they have retired, switch it to an alternative usage.
As the emphasis on providing holistic financial planning is destined to gain momentum in the new RDR world, I am confident we will see the focus on multi-usage whole-of-life really start to come into its own.
Has run Cautious Managed fund since 2011
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Invested from 2006-2011