Although whole of life sales have suffered due to cheap term rates and the poor stock market, it can still provide the best solution for some clients, finds Paul Robertson
While there is no data yet available for 2002 sales of whole of life (WOL) policies it would be a safe bet that this product has not had a good year. As a product, it has been buffeted from two sides, the rising popularity and continuing affordability of term assurance and the poor performance of the world's stock exchanges. This has been the case for several years ' the Association of British Insurers' (ABI) collated sales figures show a steep decline in sales. In 1999, ABI figures show sales at 484,000. By 2001 this figure had fallen from 353,000 in 2000, to 265,000.
Out of fashion
Theoretically WOL cannot be beaten as a concept ' you pay your money and there is a guaranteed payout on the certainty of your death, without a time limit. However, effectively these days most people would use it for inheritance tax (IHT) planning or long-term protection, where people are worried they may become uninsurable. However, these investment-linked policies have become out of vogue as the sales of term products have rocketed.
Roger Edwards, products director at Bright Grey, says: 'Term-based products have become far more popular, especially since menu-based products were launched around 1995. Prior to that, WOL was the preferred protection product among IFAs.'
However, Rogers was never a great fan of WOL: 'It is quite a complicated concept and most WOL plans are investment-linked, which I always felt got in the way because you would spend most of your time talking about which fund you were investing in. People were buying it for the life cover or even the critical illness cover and were drawn off the message. As a product it is probably more for the niche of Inheritance Tax planning, rather than as a vehicle for straight life or critical illness cover,' he says.
It is fair to say the popularity of WOL for straight cover purposes has waned, as has its use for investment purposes. Kevin Carr, senior technical adviser at protection brokers LifeSearch, says: 'I agree WOL is retreating, and becoming mainly an Inheritance Tax planning tool. It used to be sold as investment with a bonus life cover, but with the reducing cost of term assurance, one could say that, generally a term policy with a separate investment would be the better option nowadays.'
It is the investment aspect of WOL that is coming under a degree of scrutiny at the moment. Policies, traditionally made up of an insurance element and an investment element, are sold as maximum or standard versions. Maximum policies, where the insurance element is maximised and the general expectation is that the premiums will rise at the review periods, are perhaps less affected by poor market returns.
Edwards explains: 'Because so many units are cancelled each month to pay for cover you very rarely get the chance to build a fund up, so the actual performance of the market does not really make much difference.' He also pointed out that in the early 1990s if an IFA quoted a maximum WOL policy there would be a projected fund value at the 10-year mark, but the majority now has little projected, if at all. This is because providers are targeting more or less a zero fund at 10 years, as this makes the premiums as cheap as possible. However this also virtually guarantees a hefty increase in the premiums at the review.
The other side of the coin, the standard basis, has more exposure to the stock markets in an attempt to get returns on investments to pay premium hikes. With recent poor market performance there is an increased risk of a large, upward movement in premiums for these plans as well. However LifeSearch rarely recommends the maximum policies, preferring standard policies, unless that is all that the client can afford. The reasoning is that all efforts should be made to ensure premiums should never need to be reviewed.
On the up?
Carr is quite upbeat about the chances of the investment elements of standard policies hitting targets. He says: 'You have to view it over the long term. We estimate the likelihood of making 6% over time is high, however unlikely it is over the next few years. For those under 60 there is 10 years to make the target.'
This is not a universally-held view. Shelley Robertson, protection brand manager at Skandia, says: 'Rates on some standard policies could well be in line for an increase. If you look at standard cover, the net charges on an onshore product would be based on a return of around 6% per year. If you look at the last five years' fund performances you will find many funds are negative. 6% has historically been easily possible over 10 years ' the period before the first review ' but do you think it is possible over the next 10 years if inflation rates stay low?'
She adds: 'If you think the Government may be aiming to enter the euro and you take account of the policies necessary for that, then 6% could be seen as a bit challenging. If you add in fund charges you could be looking at over 7%, which is ambitious. Many contracts were launched in the mid-1980s and, having already had their 10-year review, are coming up for a five-year review. These contracts could be seeing some changes in premium.'
IFAs do, of course, have the choice of skewing payments in favour of investments in order to minimise loss. The beauty of unit-linked WOL policies is that you can decide, within a maximum and minimum premium limit, how much you want to pay in, which would reduce future worries.
Alternative solutions
When WOL life cover is involved with IHT planning it is the amount insured that is important. A policy is normally put into a flexible trust, which is tax-free and can be used to pay off any IHT obligations. Trusts are a popular free add-on to a product and can save an IFA's client 40p in the pound. WOL is still the main product looked at if IHT planning is the main goal. However, there are alternatives. The market has recently seen the advent of rolling term policies, a renewable term policy with no end date.
Edwards is interested in this type of policy for the yet-to-launch product range of Bright Grey. The company will not be including a traditional WOL policy at its launch.
'I find rolling term assurance attractive. What I find great about these products is that you do not have all the complications of discussing units and bid/offer spreads. You just have basic protection with the added advantage of it being continuable throughout life. But I am interested in whole of life-renewable term hybrids because Inheritance Tax is an issue that, unless the Government changes its mind, will not go away,' he says.
The premiums on these policies will rise at review dates, normally every 10 years. These policies act as facto maximum WOL.
Robertson says: 'It does get very expensive when you get old, but only in the same way that maximum cover premiums increase as you age. This is why some prefer the guaranteed whole of life route or aim for standard cover.'
Guaranteed WOL is unique to Skandia at the moment, it is in effect an update on non-profit WOL policies.
Premiums are not linked to any investment and the premium is guaranteed for the life of the policy. The product has no investment element and therefore there is no cash in value.
Carr is a fan: 'This product is initially a bit dearer, but sometimes only about 15% to 20% more than standard whole of life, but this is 100% guaranteed for the term of that contract. When the purpose is Inheritance Tax planning and the client is not looking for an investment and not wanting a cash-in value, it is ideal,' he says.
Any round up of WOL would be incomplete without mentioning critical illness (CI) policies. Until the mid-1990s almost all CI was written as WOL, therefore on a reviewable basis. However, since then the success of guaranteed term products have eaten heavily into this business. But Edwards notes there are still a few IFAs who will sell a CI policy as WOL, with the point of view that you are more likely to have an illness post-retirement.
'It almost strays into the territory of long term care planning. With the problems guaranteed policies are having, maybe renewable whole of life critical illness will become more popular again,' he says.
Regardless of the steep drop in sales figures IFAs still sell over quarter of a million policies a year. There are a number of IFAs who still feel WOL products constitute good advice. Even the standard policy, if it is affordable to the client, can be a good solution for someone looking for protection with investment in certain circumstances. The tale is similar to endowments ' you never hear of the successful endowments, and there are still endowment mortgages being sold within the bounds of good advice.
