They say that everything comes to those who wait. In my case it turned out to be true - but what a wait it turned out to be.
The event in question is the announcement from the Financial Services Authority (FSA) that the ridiculous rule which defined as an investment, any product that includes pure term life insurance if the term is 10 years or more and it ends after age 70.
That’s why it’s often called the “70/10 rule” and scrapping it is something I’ve long been campaigning for.
The 70/10 rule dates back to the 1980’s when investment products were first defined for the purposes of regulation. But it wasn’t until general insurance regulation was looming that it looked as though it was going to cause a problem.
One reason was that two different regulatory regimes could apply to the same product depending on the selected expiry date. It would have been great to get rid of this daft rule before general insurance started in January 2005 and I, for one, campaigned for this.
It wasn’t to be and the rule resulted in additional costs for the industry through more complex quotes systems and literature which needed to cope with two regulatory approaches. But in practice, a lot of insurers simply didn’t offer term life beyond age 70.
Regulation was always meant to be about protecting consumers but this rule simply reduced consumer and adviser choice. So the campaigning to scrap the rule went on.
In the meantime, advising clients was more complex and in its announcement the FSA acknowledges a lot of firms were technically in breach of this confusing and pointless rule. Thankfully, common sense has prevailed and the FSA says no action is to be taken.
However, along with scrapping the 70/10 rule, there are some technical changes to be made to ensure term life cover is always sold under the appropriate regulations. And insurers will need to unscramble the separation of the “investment” and “non-investment” type term life cover plans - which was unnecessary in the first place – but better late than never. We need to get this right now – be warned!
The good news is that from 1 June, scrapping the 70/10 rule will open up some new opportunities. We’re all living much longer these days and we’re delaying our retirement and extending our working lives too – not least because the value of many people’s pension is less than they had expected - but new fertility treatments are allowing women to have children much later in life, and it’s not unusual for people to have “second families” where couples, who individually might have had families with a former partner, now want to start a new family together.
Property prices are also forcing some people to spread their mortgage repayments so much longer mortgage terms are becoming more common – with some lenders prepared to make advances over 30 years and in rare cases even 50 years.
For all these reasons, people increasingly need protection over a much longer term.
Another potential new opportunity comes from opening up the Inheritance Tax (IHT) planning market to ICOB advisers though one of the simplest and least controversial IHT solutions – the use of pure protection whole of life plans written in trust to pay the tax bill.
This simple and effective solution for IHT planning will now be regulated under ICOB. Even with the nil rate IHT threshold increasing to £300,000 on 6 April this year, with plans to increase it to £350,000 from April 2010, a firm of mortgage brokers may well have clients whose property value takes them well over the IHT limit, especially those based in areas where property values are highest.
One estimate suggests almost 5 million homes could be affected, so the market is potentially huge. Of course, all this is theoretical unless we also get a market for pure term whole of life products that are available to ICOB advisers – an opportunity for insurers perhaps?
Entering this market would require a significant investment for insurers to develop products and also for advisers - for example in training - so it remains to be seen whether anyone will take up the challenge.
For firms of advisers with the right client profile this could be an attractive opportunity to gain a growing share of clients’ business – so it might be worth a thought.
The views expressed are those of the author and not those of the company he represents.IFAonline
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