The Covid-19 pandemic has served to illustrate that the unexpected can happen and to emphasise why protection should feature in advice recommendations, says Ian McKenna, founder of the Financial Technology Research Centre and ProtectionGuru.co.uk
The events of 2020 will clearly have a dramatic impact across the financial advice industry in 2021. It’s hard to be confident about the prospects for investments; equally many advisers fear that, without an extension to the stamp duty moratorium, the mortgage market will suffer significantly.
But one area, often neglected by financial planners, looks likely to be in more demand than ever – protection and particularly income protection.
It’s my view that the successful advice business of 2021 will be putting protection at the heart of everything that they do.
Protecting income really should be the second consideration, after emergency funds, of any sound financial plan. If the client doesn’t have ongoing income, how can they afford the day-to-day necessities of life, never mind any form of savings or borrowings?
While it may have become unfashionable to point out to clients how they would struggle to maintain their lifestyle if forced to live on the £95 per week, which is all they would receive in state benefits, it’s well worth considering the differences in the conversation with a client who has income protection in place when they suffer a major illness, as opposed to one who does not.
It’s important to recognise that the chances of long-term illness during a career are actually far higher than death. For example, a 40-year-old man in white collar employment is 12 times more likely to have one month off work through sickness than to die, three times more likely to have three months off through sickness, and twice as likely to have six or 12 months off through sickness. (source: Royal London & Institute and Faculty of Actuaries Continuous Mortality Investigation Income Protection Committee Working Paper 124, September 2019)
When considering protection for a client’s income family income benefit can be a great second contract to arrange as part of an income protection and life cover package.
Looking at the claims data available from multiple insurers over multiple years, the average claim on an income protection plan written to retirement date lasts for between three and nine years. How would most client’s long-term financial plans look if they had been without income for just three years?
The combined effect of mortgage arrears and other financial pressures would mean it might take a decade, for the client to be fully back on their feet. There is strong evidence that after a long absence many careers never recover. This is a good reason why some Critical Illness cover can be valuable as well, if it can fit into the available budget.
What impact would having been unprotected against a long-term illness have on the future relationship with a financial planner who didn’t recommend protection? This may not be a comfortable conversation to have with clients but during the pandemic an increasing number of protection advisers report clients are more willing to engage in such difficult conversations.
Since the Insurance Distribution Directive was adopted into FCA rules in November 2018, all advisers identifying a protection need have a duty to either address that need themselves or signpost the need to another organisation that is capable of providing such support.
If the wealth advisers in the business are not comfortable with protection, a growing number of wealth firms are finding that having an in-house protection expert can be a valuable addition to their team. Alternatively, there are now established industry procedures for signposting to other firms.
Protection should also present significant additional opportunities for paraplanners both in-house and freelance to provide additional support.
Even if you only look at a consumer’s largest monthly outgoing, for most people keeping a roof over their head, currently one in two mortgage borrowers have no life insurance to protect the loan and only one in five have taken out income protection. In the rented sector the lack of protection cover is even worse. Typically, renters enter into a 12-month contract yet statutory sick pay only last for 26 weeks.
Having entered the second lockdown period there has never been a time when it is more appropriate to double check the level of protection clients have for their income so that they can be confident they can continue with the rest of their financial plans in the event of serious illness or worse.
Ian McKenna is the founder of Protection Guru.co.uk a technical information service covering all areas of life insurance and protection products. It is available free of charge to UK financial advisers and their support staff. Ian will be presenting a webinar on “why protection is essential to every financial plan” for the Personal Finance Society at 1 pm on Wednesday 11th November you can request tickets here
