With less than inspiring sales of underwritten whole of life, Ian Jefferies, explores the opportunities that still exist for advisers beyond the current market
For a product that addresses a very strong set of customer needs, few people would predict booming sales of underwritten whole of life plans in years to come.
By 2011 sales of unit-linked plans had dwindled to a mere 1,300 cases. The demise of this variant started with the closure of the direct sales forces from the late ‘90s.
It continued with a gradual decoupling of protection from investment as the Platforms emerged and with the growth of more sophisticated fund choices.
The Retail Distribution Review will undoubtedly put the final nail into the coffin of the unit linked plans as they will fall under the rules requiring adviser remuneration by fees.
Meanwhile non-linked plans have faired only marginally better with just over 14,000 cases sold in 2011 which was a fall of more than a third from 2010.
This is in stark contrast to guaranteed acceptance whole of life business for the over 50s which is bought to cover funeral costs and to leave small family legacies. Industry data shows that more than 385,000 such plans were successfully direct marketed in 2011 and demand continues to grow.
All of this is disappointing for the underwritten product which was once a key element in financial planning, offering certainty of pay out at an affordable price.
The attraction of cheaper term assurance with a fixed period of cover, often linked to a mortgage has increasingly won the lion's share of sales volume.
In essence, mortality versus morbidity dynamics are changing the long-term risks and needs of the nation
Data from the Department for Work and Pensions indicates that more than a quarter of our under 16s can expect to reach age 100 with over 650,000 centenarians likely to be alive by 2081.
The result will be more people spending longer in retirement with long term care costs eating into their savings.
Recently the Dilnot commission made recommendations to reduce the impact of potentially catastrophic care costs with a personal cap being applied at around £35,000 and the introduction of a means testing threshold.
A key question arising is whether this will mean a larger target market for anything other than the guaranteed acceptance plans.
Clearly many people already worry about running out of cash to pay for their funeral as can be seen from the sales statistics. The easy "no medical questions to answer" process undoubtedly adds to the appeal.
However, opportunities still exist in the advised whole of life market
Although some long established providers have exited, new entrants have come into the whole of life market with combinations of aggressive pricing and value-added underwriting options and technical support.
A recent review of Defaqto shows that around 11 providers are currently in the market with many prioritising the product more highly within their portfolios.
A key attraction to this type of business for both advisers and providers is that by focusing on the right customer needs and target markets, typical case sizes can be substantial and business quality high.
The majority of underwritten whole of life business is written for relatively mature customers between the ages of 40 and 60 with average sums assured of over £500,000.
Niche opportunities exist in the following areas:
Estate planning:
A well recognised use of the product is in estate planning for Inheritance Tax mitigation above the £325,000 threshold. Some might argue that this is a small market focused on the rich elite.
Indeed, HMRC statistics show that only around 2% of estates pay any tax, which is around 16,000 estates each year.
Since October 2007, married couples and civil partners have also been able to transfer their unused nil rate bands which will bring the threshold for many estates up to £650,000.
Set against this, there are clearly some very wealthy customers with potential tax liabilities to mitigate. We also shouldn't be blind to the likelihood that at some point house prices will return to a sustained period of growth.
Without a corresponding increase in the IHT threshold, many families would be drawn back into the reach of the death tax, expanding the market for advised solutions.
A further opportunity that the industry could grasp more effectively is for the provision of worthwhile family legacies through whole of life plans written under trust.
For people worrying about the long term care costs that they may face in later life and wanting to ring fence funds to leave to their nearest and dearest, this provides a simple solution. The kids could even take over payment of the plan premiums in later life.
Business protection:
It is well recognised that most small to medium sized enterprises have no cover and that the market potential is large. Some estimates put the business protection shortfall as high as £1.1 trillion with scope for substantial average case sizes paid from corporate funds.
Whilst commercial loan cover will tend to be written on fixed term assurance plans, whole of life could be considered for key man and shareholder protection cases.
Cover is often set up to retirement age but there are merits in setting it up to last throughout life. This would allow it to be assigned to the life assured after retirement when it might be difficult to set up new replacement cover on a personal basis for medical reasons. Naturally any tax implications will need to be taken into consideration.
We need to look beyond the current market in order to build a brighter future for advised sales of whole of life
RDR could well be the catalyst that moves the whole of life product and protection business more widely into a new space.
Commentators across the market have been forecasting a much higher prioritisation and take up of protection by wealth managers from 2013, as the RDR move to remuneration by fees poses new challenges to cash flows.
Wealth managers are making widespread use of platforms to manage their clients' investment and pension needs online with access to a range of tax wrappers and fund choices. This brings new levels of management and administration efficiency to the adviser / client relationship.
It also brings significant opportunity to streamline and to simplify protection sales by integrating them with platforms.
Crucially, it could also move protection away from being viewed as a poor relation of wealth management by building it into a holistic and value-added way of managing client wealth creation and preservation.
Platform integrated protection would allow a new breed of whole of life product to be designed, enabling client IHT liabilities to be managed by matching them to new and existing cover.
It would also encourage the development of yearly renewable term cover as part of a platform solution, bringing the flexibility to adjust cover as needs change beyond the IHT requirement.
Breaking new ground in this way would come with many technical challenges. However it would also bring significant appeal with the integration of quotes, applications, workflow and reporting within platforms.
There could also be scope for premium payment to be made by investment unit cancellation or by deductions from platform cash.
Whilst it can be superficial to draw comparisons with other International markets, it is notable that in the UK we have similar market and regulatory factors at play as in Australia where platform protection has grown to around 15% of new sales.
At a time when our market is regarded as lacking in the delivery of true innovation, platform integration could well be the key to unlocking a much brighter future for whole of life and to elevating protection to a more pivotal role in wealth management.
Ian Jefferies is head of protection at Skandia
