Advisers have paid little attention to whole of life plans in recent years, preferring to concentrate on their more popular and straightforward cousin, term assurance. But a series of changes on the product, regulatory and economic front could see a revival in sales in 2009.
Figures from Swiss Re indicate that a recovery could already be happening. In 2007 whole of life was the only area of protection to experience an increase in sales, rising by 12.4% to 219,362 policies. An important contributor to this was the Financial Services Authority’s decision to allow whole of life products with no cash value, other than on death, to fall under the ICOB rules and to be treated as pure protection. The decision means that ICOB registered advisers can sell whole of life plans that have no investment element, thus opening up more access points for consumers.
Another development has been the introduction of guaranteed rates on whole of life plans. Advisers now have a choice of three options to recommend to their clients: maximum cover, balanced cover and guaranteed cover. Maximum cover is the cheapest initially but the premiums are reviewed at regular intervals and will rise as the policyholder gets older. Balanced cover has an investment element built into it to subsidise premiums as the policyholder gets older, but if the investment does not grow at the predicted rate premiums may increase at the initial 10 year review and at any subsequent reviews.
Alan Lakey, partner at IFA firm Highclere Financial Services, says: “The premium on reviewable whole of life policies is a guess which is based on assumptions of mortality and the growth of the underlying investment. At the end of 10 years the consumer’s premium could rise from £20 to £48 or their cover could reduce from £75,000 to £34,000. No matter how clearly it is explained to clients that there will be a review, it still comes as a shock to them.”
By contrast, guaranteed whole of life plans are not dependent upon the performance of an investment and offer a fixed premium for life. The disadvantage is that because there is no investment element they are likely to be the most expensive plans initially. Providers that offer this option include Skandia, Norwich Union, Legal & General, LV= and Zurich. Bonnie Burns, protection marketing director at Legal & General, claims that its whole of life plan is popular because consumers like the certainty of guaranteed premiums.
The economic downturn is another factor that could contribute to a rise in sales of whole of life plans this year; advisers who have relied on mortgage and investment advice may need to look for other sources of income.
Ian Brown, protection marketing manager at life insurer Skandia, says: “My personal view is that a lot of higher end advisers have been doing lots of pensions and investments work, but this is slowing up. Now is the time for them to look at their clients’ inheritance tax (IHT) liabilities, and this could contribute to an increase in sales.”
Brown suggests that whereas business protection was the key focus of 2008, IHT could be the area that advisers focus on in 2009 if providers make enough noise about it.
Using whole of life plans to mitigate an IHT liability is one of their most common uses. The plan will pay out a lump sum to the dependants on the policyholder’s death which they can use to cover the tax charged on the deceased’s estate. The plan should be written on a second death basis, which is when the tax liability arises, and it must be written in trust so that it falls outside the deceased’s estate.
For the financial year 2008/09 the IHT threshold is £312,000 and the government has announced that the rates in 2009/10 and 2010/11 will be £325,000 and £350,000 respectively. If an individual’s estate is valued above this, tax is payable at 40% on the amount over this threshold. Although falling house prices should mean that less people will attract an IHT liability, there will still be significant numbers who need to be protected. In London, for example, the average house price is £306,183, which means that in 2009/10 the average homeowner would only need a further £19,000 in assets to be over the threshold.
L&G’s Burns says: “The increase in people’s wealth through their houses means there is a huge amount paid out in IHT each year, and it is a very unpopular tax. There are a fair number of people around with an IHT issue who don’t know they have it. It was a tax of the rich but it is not anymore.”
Another common use for whole of life plans is to cover funeral expenses. Some providers, including Norwich Union and LV=, have so-called 50 plus plans which will pay out a guaranteed cash lump sum to help towards funeral expenses and unpaid bills when the policyholder dies. The plans are generally sold through direct marketing and are non-underwritten, although some IFAs also recommend them.
Chris McFarlane, head of protection at LV=, says: “We have had a number of enquiries from IFAs who want to use their databases to sell our 50 Plus plan to their pension and annuity clients. It is perhaps a sign of the times – IFAs have to focus more on protection.”
Whole of life plans can also be used as critical illness (CI) cover, although this became much rarer after insurers devised CI on a term assurance basis in the 1990s. It could be argued that because people do not know when they will become ill, they should not limit cover to 10 or 20 years. However, if someone has a 25 year mortgage it is unlikely that they would want, or need, to cover themselves for 40 years.
“If a client has taken out a mortgage and their finances are limited they might not be able to afford a CI plan,” says Highclere’s Lakey. “They could just reduce the sum assured, or they could take whole of life reviewable CI where, because it is costed, the first 10 years could be half the price. In 10 years the premium will go up but the client might not care because by then they may be earning more.”
Reviewable whole of life plans also have some appeal as key man insurance. A whole of life policy can be taken out on the finance director for, say, £500,000. When the director leaves, the company can either cash in the policy or it can assign it to the director for him to keep paying as personal protection.
Whole of life plans clearly have many uses, but it is unlikely that there will be a big marketing push any time soon.
Richard Verdin, director of protection marketing at Norwich Union Life, says: “We are keeping our product fresh so it is competitive within our peer group, but it is not an area we place a lot of emphasis on or invest in. The market is stagnant and I can’t see why that would change.”
The product is not nearly as popular as term assurance. In 2007 there were 219,362 whole of life policies sold compared with well over a million term assurance policies. L&G’s Burns suggests this is because the link between a mortgage and protection is more easily understood, whereas there isn’t really a trigger for IHT advice, except perhaps drawing up a will.
Gerry Warner, protection development manager at Zurich, adds: “Whole of life is a niche market because very few consumers think about what happens when they die and IFAs find the policies a bit more complicated than other protection products. Investment IFAs might be reluctant to recommend a whole of life plan and put their client through medical underwriting because if adverse terms are given it could harm the relationship. Advisers also need knowledge of trusts.”
The good news is that help is out there. Most providers have information on their websites and technical helplines, while Zurich has developed an IHT tool that shows how to mitigate a client’s tax liability. Given that the sums assured and premiums – and therefore levels of commission – are often higher than term assurance, it is worth making the effort.
WHAT ARE WHOLE OF LIFE PLANS?
Whole of life plans are life assurance policies, designed to provide the policyholder with cover for their entire lifetime. The policies only pay out once the policyholder dies, when the policyholder’s dependants will receive a lump sum, usually tax-free. Depending on the individual policy, policyholders may have to continue contributing to the plan right up until they die, or they may be able to stop paying in once they reach a stated age, even though the cover continues until they die. Some plans also offer cover for additional benefits, such as a lump sum that is payable if the policyholder becomes disabled or develops a specified illness.
Source: Financial Ombudsman Service