Despite ailing sales figures, industry experts are adamant whole of life products still have a place in the market. Johanna Gornitzki reports Click here to download pdf
The whole of life (WOL) market has experienced its fair share of difficulties over recent years. Between 1998 and 2001 sales encountered a sharp decline, but after three years of bad crop, many industry experts believed the trend had finally reversed when sales rose by nearly 13.5% in 2002. Unfortunately, this prediction proved incorrect.
According to figures from Swiss Re's Term & Health Watch 2004, WOL sales dropped from 254,357 in 2002 to 230,698 in 2003 – nearly as low as in 2001 (224,168) when sales hit rock bottom.
While figures for 2004 have not yet been made official, insurance experts forecast that sales have remained more or less level. Shelley Robertson, protection brand manager at Skandia, supports this view. "Sales have remained broadly consistent over the last year," she says. Ron Wheatcroft, technical manager at Swiss Re, also predicts a "flat year for 2004".
Other statistics even suggest that sales have continued to falter. Data released by the Association of British Insurers shows that the number of new sales between Q1 and Q3 in 2004 were in fact down compared with 2003. This does not bode well for an already battered WOL sector.
That said, although sales figures look set to disappoint, it must be noted that a major leap in sales was never really expected. This is because the WOL market has always been looked upon as a rather small niche area, which could never compete with the more popular term assurance market.
Examining consumers' protection needs, Kevin Carr, senior technical adviser at LifeSearch, says there are four key areas intermediaries should focus on; mortgages/debts, income, family members or dependants and inheritance tax (IHT). He believes the first three are usually best addressed with term assurance because each of them is linked to a term. "The children will grow up, the mortgage will have a term and you will retire," Carr says. "Term assurance is also the cheaper option", he adds.
Battered sector
This leaves IHT as the only option best suited to WOL. A majority of advisers agree. "Whole of life is mainly an inheritance tax tool," says Richard Verdin, sales and marketing director at Direct Life & Pension Services.
The need for an IHT tool has become more acute as booming house prices have pushed more people over the £263,000 IHT threshold. "The ordinary person in the street is now likely to suffer from the Inheritance Tax threshold as house prices have continued to soar," notes Verdin. Carr concurs: "Inheritance Tax used to be a tax for the rich, but given average house prices it is now a tax for middle England."
Other data backs this view. Referring to Swiss Re's statistics, Robertson says that IHT liabilities on death have risen from £1,426m in 1995 to £2,321m in 2001 – a staggering 63% increase.
While the product may be best used as an IHT tool, WOL policies are still mainly taken out to cover funeral costs. "Out of the policies sold in 2003, the majority were for funeral plans," says Robertson.
Although the sum assured is usually quite small – around £4,459 for funeral plans compared with £130,000 for non-funeral plans – the need for this type of protection cover is constantly increasing as the UK population grows older. The extent of the growth is immense according to Sue Wilkinson, head of life and health propositions at Abbey for Intermediaries, who forecasts that the retired population in Britain will increase by 113% by 2050. For advisers recommending WOL products, this could mean that they will have a target post-retirement group consisting of over 20 million people.
With the population growing older and the property market continuing to go from strength to strength – two factors most likely to spur someone to opt for a WOL product – one would expect sales to have faired better. Yet this has not been the case.
Complete shift
One of the reasons for this is the fact that the majority of WOL policies have an investment element attached to them. The difficulties in explaining how the performance of the stock market may or may not impact on these unit-linked WOL products have left it being perceived as a rather complex product.
"The problem with the product is that many providers do not actually know how it works," says Robert Reid, managing director of Syndaxi Financial Planning.
Wilkinson, however, disagrees. "The product is no more complex to most intermediaries than any other protection plan. However, the regulatory rules which divide pure protection from non-pure protection products are a contributory factor that limits its growth," she says.
Apart from being seen as rather complex, investment-linked WOL policies have also become hard to sell following the poor investment returns seen in recent years. This has left many policyholders receiving sums much smaller than they had expected. In effect, this has made consumers turn their back on this kind of product.
With this in mind, Verdin predicts that there will soon be a complete shift away from WOL products with an investment element. "In the longer term we will see insurance-only contracts," he says.
Guaranteed WOL products – a type of WOL solution with no investment element – have indeed increased in popularity.
However, while Robertson admits this is the simplest WOL product because there are no fund performance or premium review issues to explain, she refutes that their growing popularity has anything to do with the debris of the investment market.
"Guaranteed whole of life products are increasing in popularity. However, this is not necessarily linked to the demise of with-profits but is more likely to be associated with rising house prices and the number of people with potential Inheritance Tax liabilities," she explains.
Wheatcroft admits that there is a huge IHT need, but remains unsure whether that will be enough to push people into buying a WOL product. "For many people there is probably an awareness that their house has increased in value, but whether they do something about this, is another question. Changes in the housing market are likely to affect the term assurance sector more than the whole of life market," he says.
Moving away from non-guaranteed plans would probably help if the industry wishes to see WOL sales return to a more healthy level, suggests Reid. "Life cover is supposed to provide people with certainty. If you can get a product you can rely on, sales would probably pick up," he says.
However, while guaranteed WOL cover may provide peace of mind, it doesn't come cheap. In fact, it is the most expensive type of WOL cover available, which begs the question: is the product viable?
The industry thinks so. "For as long as customers need to plan for funeral costs and Inheritance Tax costs it is, but it has to undergo some changes," says Verdin.
Whether WOL sees a rise or fall depends more on politics and the housing market than the product itself. "As an inheritance tax tool its popularity will depend heavily on the housing market and inheritance tax legislation. A significant further increase in house prices or reduction in the inheritance tax threshold for example could see a reversal of the industry downward sales trends," says Robertson.
Carr agrees that the future of the WOL market is, in large part, in the hands of politicians. "Whether the industry will see an increase in sales could depend on what the Government will do with the Inheritance Tax limit. Many houses are worth more than this so many people are liable for Inheritance Tax without realising it," he says.
Sounding a note of warning, Verdin adds that the business opportunity this market is currently offering could also be completely removed by a future Government if it chooses to eradicate the IHT threshold altogether.
However, that is purely speculation. For now, the need for IHT planning is likely to be the key to further opportunities for the WOL market, and the industry remains positive. "We believe there is a place for whole of life and that opportunities in this area will increase," says Wilkinson.
Above all, while a WOL product may never become the belle of the protection ball, advisers and providers alike agree that it is an important and essential product in the insurance market. And as a piece of the jigsaw, it naturally provides intermediaries with another business opportunity.
