Advisers and their clients are "missing a trick" by failing to consider the impact of inflation when recommending a protection policy, according to progress from Royal Liver.
The firm also says providers that offer ‘escalation’ options – allowing consumers to increase the amount of benefit every year as inflation increases - should re-consider their methods of calculating premiums and start offering ‘pay as you go’ terms instead.
Consumers tend to think in today’s monetary terms, says progress, despite the fact protection claims can happen many years after they arranged their cover.
It points out a loaf of bread that cost 16p in 1975 now costs 71p and argues failing to take inflation into account can leave consumers feeling short-changed when they do make a successful claim.
“A client will cover their mortgage but people forget how much inflation affects day to day prices,” says Mike Farrell, head of IFA sales and marketing at progress from Royal Liver.
Andy Milburn, IFA market manager, adds: “One of the tricks people are missing is covering protection customers against inflation. People can’t see the woods for the trees at the moment.
“We’re trying to raise awareness of escalation options which will, we hope, also help plug the protection gap.”
Providers currently use several methods of calculating escalating premiums, meaning the total price paid over the term of a plan can vary between providers.
But progress says its method, which it dubs ‘pay as you go’ and is available on both term assurance and critical illness cover, is the fairest way of calculating premiums.
It says its premium increases are not linked to RPI, as it is with some providers, but calculated using the extra benefit amount, the underlying premium rates, the policyholder’s age at the time of the increase and the term outstanding.
Mike Farrell says: “Escalation options have not been particularly successful because some providers charge for the full price of premium increases up front. They are significantly bumping up their premiums to cover it [inflation].
“We’re calling on providers to move to the pay as you go system.”
Have your say:
"I agree with the principle that protection policies should always have inflation indexing built into them. I disagree with the idea the increases should be charged on an age attained basis. This leads to clients suffering large increases in premiums when the cover is most likely to be needed, and least likely to be able to be re-broked to a less expensive policy. When the premium and cover rise in line with whichever method of indexation is being used, the client knows what level of cost to expect. How would they know if life companies were to increase their rates and increase the cost of future indexations? Keep the option for indexation to be factored in at the outset of the policy for me, please." Philip Bell, IFA, Hampton Dean
020 7034 2636
Due to leave 31 May
Latest news and analysis
Underperformance still present – for now
Regtech or fintech
15% increase in number of claims paid