Inheritance tax planning and providing funeral costs are the typical uses for whole of life products, but Owain Thomas discovers there is more to it than just covering your financial burdens
Most of those involved in the whole of life market will be aware that the sector is split into two main factions; an underwritten product that tends to be used for inheritance tax (IHT) planning purposes, and the frequently seen-on-daytime-TV over-50s style plans, typically used for covering funeral costs.
With the inheritance tax threshold nil rate maximum currently set at £325,000 many clients may be thinking ‘I'm not a very wealthy person, all I've got is my house,' but that can be enough to push them very close to the threshold. And in certain parts of the country it can take them right through it, meaning anything above the limit is taxed at 40%.
This typically older clientele also demands that underwriting is done sympathetically and quickly, hence the obvious niches of immediate acceptance plans and the higher net worth products.
Different directions
As Bonnie Burns, product and technical director at Legal & General explained, these two products appear to be travelling in different directions.
"The underwritten product has been pretty slow, stagnant really, whereas the over-50s plans have been increasing quite considerably," she said.
"We think the underwritten market dropped off due to the introduction of sharing IHT allowances between spouses, so that reduced the number of people who needed to cover their inheritance.
"And there have not really been any new products. It is quite a traditional market, the plan has been around for a long time and we have not seen an enormous amount of development really. You take a policy out for a sum assured, and when you die we pay it - that tends to be the way products are developed," she added.
And this simplicity of product when coupled with no underwriting restrictions appears perfectly placed for direct selling, explaining why the over-50s plans have performed so well for those providers involved.
"It is quick and easy to take out, does not need any advice if bought online and there is no underwriting which can be appealing to the older client who might not want to go for tests and investigations. So the appeal of just being able to take it out there and then with no medical evidence can be appealing to an older group of people," Burns continued.
Potential barriers
The current population and economic dynamics could also be a potential barrier to the underwritten market's growth. As people are living longer, and being increasingly required to pay for their retirement or long-term care needs, it is possible that some expect the majority of their wealth to be spent on these areas.
However, despite these downfalls, Burns still feels fairly upbeat about the market.
"There is obviously still a proportion of the population who have not protected their inheritance and I am sure there is a market for advisers who want to get to grips with IHT, wills and trusts," she said.
"IHT planning is complicated and you would need to see an adviser about managing your estate, other products available and putting things into trusts. That is something still within the advised domain, whereas a funeral plan is much more simple to understand and can be bought much more quickly."
Paul Edwards, head of investment and pensions at Roxburgh Financial Management, agrees with much of Burns' market view, including her generally positive outlook.
"The vast majority of our whole of life (WOL) business is the IHT variety as a lot of over 50s plans go direct," he said.
"It is one sector that we see as a growing market, especially as the nil rate band continues to be pegged back with regards to real terms increases, while house prices have pushed a large portion of clients into that IHT liability bracket."
Edwards explained that the vast majority of IHT liabilities faced by his clients are due to their house, something they can not gift away or place into trust if they want to remain living in it, meaning the only real route for them is the whole of life market.
However, WOL policies can be more useful than simply a form of IHT planning.
"We have done some research and it is actually quite a good investment for the children if they are happy to fund that. They get a known pay out to fund any IHT liability but it is also quite a good low risk investment with a good return on contributions. So we have quite a few families having that conversation and sharing the cost of the plan.
New client generations
"The other good thing is it often needs intergenerational planning so you can have conversations with new potential clients. The parents might be the original clients but it helps bring on board the next generation who might be beneficiaries or trustees, so from that point of view it is a very useful tool to have, and adds a lot of value."
The national population dynamics previously noted by L&G's Burns identified that the concerns of older people are conversely the main reason Edwards is so positive about the potential for the market in the next few years.
"I think inheritance planning is going to be an increasing need as the population gets slightly older and maybe over the next five to ten years we might see a peak in its attractiveness," he continued.
"The baby-boom generation will start thinking about their IHT liabilities soon and they are probably more likely than any other type of client to have an IHT liability in terms of property and assets. And so I think these coming years could be good."
The need for accurate advice on the subject is also a key point for Edwards as he raises the underwritten plan's more extensive use compared to the simplicity of the funeral versions.
"People probably have slightly less confidence in getting the right product and want to make sure if they are leaving or setting up something for their children that they do not inconvenience them. It is something they want to make sure that they have got right. And the plan needs to be written in trust otherwise you are doubling your problem instead of halving it. So with that in mind, it is not something that can be so easily put on a supermarket shelf and bought or advised on," he added.
Wrinkle availability
Although the sector is not the most dynamic in terms of product development, that does not mean innovation is non-existent. Wrinkles are available that enable an adviser to tailor a product more specifically to their clients' needs, and there is even the potential to use a WOL policy itself to create a legacy.
Gerry Warner, protection development manager for Zurich, noted that options, such as no surrender values and convertible term assurance plans are one area where advisers have the ability to fit their clients' plans.
Warner explained the rationale behind not including a surrender value: "If a client is using it for IHT planning they are never going to cancel it because they have this known liability, so structuring it with a surrender value makes no sense.
"Another reason is that it means the product can be sold under ICOBS because, like any other pure protection plan, there is no surrender or investment element. And by removing the surrender value you can make it cheaper, because if you are going to pay something back at any time there is a cost to that.
Convertible term assurance policies are another variation that bear consideration. These allow a customer who is fairly sure they have an IHT liability but cannot afford WOL immediately to initiate cover. They can take out a convertible term assurance and then at any point convert to a guaranteed WOL plan without further underwriting.
And, Warner cautioned, that most reviewable products were often recommended to be sold under COB guidelines.
"If an adviser is selling any kind of reviewable product it is essential that they understand the review because there could be a shortfall, and so they can discuss this with the client at the point of sale and the review," he explained.
Creating and preserving estates
Warner is a big fan of the market and believes there is a definite opportunity for growth in the future while it can be used to help create an estate, not just preserve one.
"Sometimes grandparents do not have a lot to leave their grandchildren, so if they put in £15-20 per month that leaves a guaranteed estate," he said
"For anyone taking out a WOL contract, as soon as you pay your first premium you have created an estate, but you have to keep paying. For example, as soon as you pay the first £50 you have a £200,000 sum assured, but if you put it in a bank account all you have is £50. Clearly that comparison stacks up very well over the early years, but there can be a time where if someone lives for a very long time, while the sum assured remains static, they pay more in than they get back," he added.
Although the market is generally seen as a very traditional one, this is not necessarily a bad thing. While the general lack of online availability may restrict the rapid changes present in the term assurance sector, the older, higher net worth client base often appreciate the more formal paper applications and with medical evidence frequently required, this does not have too significant an impact on application speeds.
Warner concluded his summary of the market by suggesting a couple of options that would be top of the wish list for future development.
"I'd like a single premium option and the ability to pay premiums over a specific term and then stop them. A single premium product is something we are asked for now and again, and for limited premiums, at age 40 you could take a plan out but know you do not want to be paying premiums out of your retirement income. What you could do was limit premiums, for example, to age 65, so the client pays a higher premium from age 40 than if they had for all their life. But it would mean that when they got to their chosen age the premiums stopped and the plan is fully funded. It is an attractive market and there is a definite need there."
