Opportunities in Protection Advice
27 September 2017
I’m a great believer in financial advice. I fully accept that simple products marketed direct to consumers will be right for some people and will help them have cover that they would not otherwise have had; and I agree with the commentators who exhort the sector to embrace new technologies to communicate with customers digitally. But, for life and protection, I can’t help questioning who or what appraises the customer of their need in the first place.
With general insurance it is clearer. The customer has a car and is aware of the possibility that it may be damaged; or the customer has a pet and knows that an operation or course of treatment at the vet would be expensive. In the life and protection sector, people seem unaware of the risks to their lifestyle and that of their loved ones in the first place and, in the second place, would probably have difficulty quantifying those liabilities.
D2C distribution of life and protection products is having a measure of success, which is good, but I have a sneaking suspicion that those who buy direct have already been sold to or advised previously and are then shopping around for a cheaper option online – just like we are encouraged to do in almost every other retail scenario these days.
And this is the crux of the matter. If it is just about finding the cheapest cover, the can source the cover elsewhere. Successful protection advisers will be those who have something more to offer. This value added element can be demonstrated with robust, transparent advice based on a deep understating of the clients’ needs. Supporting tools, such as Defaqto Star Ratings, can help to demonstrate the quality and comprehensiveness of a product as they are an unbiased, expert assessment of the products in the market place. As these ratings are based on facts not opinions they can add real kudos and value to discussions a protection adviser may have with their client when it comes to discussing the right product for them, rather than the cheapest price.
People may well understand that they need to cover their mortgage in case they die; they probably don’t understand that they are less likely to die than suffer some illness or disability that prevents them from paying their mortgage. So, at the basic level, the financial adviser can tell people about disability insurance and critical illness cover.
The financial adviser has so much more to offer than simply finding the cheapest cover for their clients. First there is the use of menu plans to help ensure that more of the client’s risks are covered at outset and to provide the framework to add additional covers and upgrade existing cover in the future as needs change. It is encouraging that in a recent study among financial advisers, we at Defaqto found that 65% of those surveyed said that they regularly used menu plans with their clients. Less encouraging was that on average advisers are making just 2.2 product recommendations per client. One would hope the average policy sales per client would be nearer three given that many people have need of income protection, life assurance and critical illness cover. Of course, as one of the benefits of menu plans is that covers can be added later when circumstances change or the client has more disposable income to address more of their needs, perhaps the exponents of menu plans in our study make additional policy sales at annual review.
Business protection, relevant life and executive income protection
Another area where advisers are rising to the protection challenge is in relation to relevant life. 62% of advisers in our study said they regularly used relevant life with clients. In July 2017, Defaqto published a guide to relevant life and executive income protection to illustrate how these specialist products can be used with clients. Business protection is another way that advisers can differentiate themselves from direct sellers, not least because many people have some corporate aspect to their life that may not be entirely obvious, and applying a personal protection strategy may not be the most cost-effective or tax-efficient way of protecting those risks. Only 50% of advisers said they regularly wrote business protection – a missed opportunity.
Whole of life assurance
Finally, whole of life assurance despite the pressure on premiums recently, remains a versatile product for those whose protection needs extends into that phase of their life which was once catered for by pensions planning. Only a quarter of respondents in our study said they used whole of life for personal protection or wealth creation and less than half (42%) said they used whole of life for estate planning – the product’s more traditional function. Pension freedoms may have created alternative ways of managing assets to avoid inheritance tax but whole of life written in trust will still be the most suitable option in some cases. In terms of lifestyle protection, whole of life will be more expensive than term assurance but protection advice should not be about finding the cheapest cover; there is no value for the adviser or the client down that route.
In our study the advisers were primarily general practitioners advising on a range of pensions, wealth and protection issues. Just over half said that their main focus was pensions and/or wealth management but that they always investigated their clients’ protection needs and made a recommendation where appropriate. Just 22% said that their main focus was protection. Either way the value of protection advice lies with sourcing innovative strategies for clients that meets more of their needs rather than finding them the cheapest cover.
Utilising such tools as Defaqto Star Ratings will help to shift the dial and empower more advisers to make recommendations as they can feel confident that these are unbiased, expert ratings.