BestAdvice talks to Ian Smart, product architect at Royal London, about how protection perceptions are often not borne out in reality.
BestAdvice (BA): Is the protection conversation currently being given the importance it deserves?
Ian Smart (IS): The simple fact is that protection should be the cornerstone of any financial planning. Almost all of us rely on our ability to earn a living, to fulfil any other plans that we’ve got. If you’re buying a house, you’re relying on your income to be able to pay for that house. But if you become ill, or even worse, if you die and leave a family behind, who is going to pay for that?
That’s where protection comes in. If you’re wanting to save for your pension, for example, you’re contributing to that out of your salary. How’s that pension pot going to fare if you’re no longer able to work? So almost all of us are relying on that income to be able to do the things we want to do in the future or even today to just pay the bills. People are struggling financially now because of the pandemic, they’re losing their income. Protection therefore should really be the cornerstone of anybody’s financial plan; before they start looking at anything else they want to do in the future they need to protect today.
BA: Why do you think advisers may be not having the conversation?
IS: There is a consumer perception that protection is much more expensive than it really is. People don’t think that they’re going to be able to afford it, so they don’t look at it, when the reality is that it is generally a lot cheaper than they think it’s going to be. When they actually deal with a proper adviser, they see just how cheap the cover can actually be made available to them. And if you’re using a menu plan, you can tailor it to your budget.
There’s also the perception that it is not going to happen to them. They don’t understand the risks that they’re running; however, I think that has been turned around a little bit with the current Covid situation, because people are recognising that they are vulnerable.
There’s also a lack of understanding of what each product does. It may be that people don’t understand the difference between income protection and critical illness.
When the pandemic first struck, we did see a huge increase in interest, particularly in income protection, because people were worried about losing their income if they were too ill to work. People were thinking “I need some protection in case I lose my job”. We’re not talking about unemployment cover here, we’re talking about income protection, which pays out when you’re ill. The unemployment cover market disappeared almost overnight, so you weren’t going to be able to get that type of cover anyway.
BA: So is it up to the adviser to simplify things as much as possible and also as quickly as possible within the protection conversation?
IS: From the adviser’s perspective, protection is often a secondary and not the primary sale, particularly if it’s in connection with the mortgage. The mortgage process now is quite long, to put it mildly, in terms of getting the information that you need in order to make the right recommendation for that particular client and so some advisers will be nervous of extending the process. Clients will be frustrated at the length of that process, so by the time you get round to the protection conversation, it’s tempting to either skip over it completely or rush it, so people don’t necessarily get the message that they should be.
Protection is not given enough weight as to its importance in the home-buying process. There is an affordability check; that should really be a trigger to say: “We know you can afford this based on your income at the moment. What if you lost that income? What if you became ill?” They’re not able to afford it, so they need protection as well. Yes, it eats into what they can afford, but it may be better to have that little bit spent on that protection to make sure they can continue to afford it rather than have an extra couple of thousand on their mortgage and something happens and they lose the house.
BA: How does Royal London help advisers with the protection conversation and potential sale?
IS: There are a number of things that we do. Obviously, we have quite a wide set of products and options, so it is possible to give a broad spectrum of cover within a budget.
The temptation for advisers in the past, is that they’re selling a mortgage, so they make sure the client has got the whole of the mortgage covered by life or critical illness cover.
But with critical illness in particular, what we see in reality is that if someone claims, they get the amount of cover from the policy which was intended to repay their mortgage, but they don’t actually repay the mortgage; they use that money to live off for a period, they might put some of it in the bank to pay other bills. So why do we obsess about having the full mortgage covered by critical illness? We should be making sure we’ve got enough money to live off for a period while they recover from that illness to take away that stress. If it’s separate life cover and critical illness cover, they’ve still the life cover there, so ultimately if they did die, the mortgage can be paid off then. But in the short term, they’ve got enough cash to live off and keep paying the mortgage and the other bills, giving them that breathing space to recover.
There is a wide range of products and options which advisers can mix and match to meet the customer’s needs and budget. We also provide various tools: the menu tool, calculators, seminars and webinars for advisers to help them with the protection conversation, how they can frame it, how they can introduce it. We also have marketing material that can be Royal London branded or personalised with their brand. So they can have a conversation with a customer and say: “I’m telling you this, it’s not Royal London telling you this. I might choose Royal London as a provider, but this is the message that I want to give you, irrespective of the provider that I’m going to recommend.”
BA: Royal London recently launched a new menu tool. How is it different from before?
IS: The menu tool allows advisers to input some basic information rather than a detailed set of fact-find information. How old is the client? Do they smoke? Do they have a mortgage? Do they have children? And then it will also tell you the chances of claiming under a traditional versus menu policy. With the menu policy you have a mixture of life cover, critical illness cover and income protection. The tool tells you what the likely cost of the plan is with various different options. But most importantly, it will tell you the likelihood of a claim being paid out. And often that likelihood of claim increases significantly. So that’s where it really comes into its own: it shows the customer that one of their reasons for not doing it – “It’s not going to happen to me” – is mistaken. Because more often than you realise, it is going to happen to you. And it just helps to hammer home that message that the attitude shouldn’t be “I can’t afford it”, it should be “I can’t afford not to”.
So let’s use an example. An individual, born in 1982, they’ve got some kids and a mortgage. They’re a non-smoker with a salary of £50,000. For the traditional method, which is for £150,000 in decreasing life and critical illness cover, it has a likelihood of claim of 17% with a monthly premium of £60. Now, if we go to a menu where we’ve got £150,000 of decreasing life, £50,000 of level critical illness cover and £15,000 of level income protection with a two-year benefit period, the likelihood of claim has gone from 17% to 42%. But the premium is £50 a month; it’s cheaper.
Under the flexibility of the menu, we show three different combinations of cover. The first, which is what we call Essential, is what I’ve just outlined, the £50 a month option. Then there’s Essential Plus where we’ve added the maximum amount of income protection as opposed to just 30% of salary. In this example, the premium has gone up to £61 a month, but now, instead of £15,000 a year, you’ve got £29,000 a year, payable for two years. That’s only £1 more than the £150,000 life or CI option, but the likelihood of claim is still 42%.
Now, if you went the full comprehensive route where you’ve got the maximum income protection and it’s payable for the full benefit and you’ve got enhanced child critical illness set as standard – which is one of the options that we’ve got within our menu – yes, the premium has gone up to £104, but you’ve got much greater cover. Instead of the benefit only being paid for two years, it could potentially be paid up until the age of 67.
BA: Do advisers know how sophisticated menu plans are nowadays or do you think there’s a lack of knowledge there still?
IS: It’s growing, but there is still a certain lack of understanding, which is why I think we’re getting such good feedback on this tool, because when advisers see how it works they really understand it.
There’s also still a certain reluctance in some parts to put all your eggs in one basket, because obviously with a Royal London menu plan you’ve got all your cover with Royal London and some compliance departments still insist that you get an individual quote from every single provider and then take the cheapest elements. Sometimes that can be a false economy because you end up with lots of different policies and people forget what each of them is supposed to do and they end up cancelling bits when they shouldn’t do. If it’s all in one place they’re much more likely to remember what the cover is for.
Finally, it’s much simpler too for the adviser. They’ve only got one company to deal with in terms of the underwriting process; they’re not chasing half a dozen different underwriters.
BA: Menu plans are widespread now throughout the industry, so how does Royal London try and stand out from the competition?
IS: What we focus on is not just the cover itself – although that’s obviously important – there are all the parts that go around it as well. So, for example, there is the Helping Hand support service. When we first launched back into the protection market through Bright Grey, we realised that people were looking for more than just a pay-out. They want something that’s going to help them. Yes, the money’s good but they need some help as well. So that’s why we offer things like bereavement counselling, various different helplines – there’s a legal helpline, for example. Support is also available through RedArc.
We have focussed our energies on making sure that it’s a rounded package, not just a good product in terms of the pure protection element, but also with the support services. We’re always looking at ways in which we can improve these in the future.
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