After another disastrous year for WOL, is there any hope for growth in this market? Lucy Quinton finds out more Click here to download pdf
Like that elderly relative who is wheeled out for the traditional family hatches, matches and dispatches occasions, whole of life (WOL) has long been in existence in the industry.
That said, yet again WOL has experienced another year of overall declining sales with figures from Swiss Re's Term & Health Watch 2006 reporting a decline from 219,927 in 2004 to 205,532 in 2005 – the lowest figure it has ever been.
Despite its apparent decline over the last decade though, there are some interesting thoughts to be shared on this particular area of the market, and there remain stalwarts within this field.
Despite the downturn in the market over the last decade, many IFAs believe the market has actually been level over the past year.
However, providers are less optimistic. John Perks, director of protection at Prudential, says that WOL sales in the market showed a steady decline from Q3 2005 to Q3 2006, when sales experienced a minor surge to bring them back up to just below Q3 2005 levels.
Perks adds that the different channels are all witnessing the same pattern but if a longer-term view is taken over the last three or four years, the IFA market has shown less of a decline than other distributors.
According to Prudential, the IFA market now accounts for roughly just under half of all WOL sales, while direct sales stand for about a third.
Like Perks, Billy Mackay, head of marketing at Skandia Life, is far less optimistic than advisers when assessing the market over the past year, confirming that sales of WOL policies have generally decreased across the market.
According to Mackay, the reason it was more buoyant in the early 90s was that very little term assurance was sold. However, this trend did not last for long. Since all WOL policies used to be unit-linked, they did poorly in times of stock market falls and went out of favour.
Now, guaranteed WOL plans would not suffer in the same way as many are index-linked instead. Another obstacle to growth in WOL sales is that clients have reprioritised their needs, investing in pensions, unit trusts, and ISAs – resulting in a decline in sales of WOL and other protection products, Mackay explains.
However, the product still has its uses, as WOL policies are used to providing a lump-sum payment that will cover an Inheritance Tax (IHT) liability due on an estate. If the policy is written in an appropriate trust, the death benefit will be outside of the estate for IHT purpose and so can be paid out without waiting for probate or being liable to IHT. Consequently, IHT can be paid immediately and the estate settled without delay.
However, Mackay adds that over the past year Chancellor Gordon Brown has introduced significant changes to the IHT treatment of trusts, which have generated uncertainty regarding how life policies held in trusts would be treated for IHT purposes.
These changes have affected sales of WOL. However, now that the situation is clearer, the changes to trust law may in fact lead to greater demand for WOL policies as a form of IHT planning, Mackay explains.
Other recent industry developments will also have a positive effect on the WOL sector. The ill-timed Pre-Budget announcement that revealed the Government is considering scrapping tax relief on pension term assurance will have wider ramifications for the protection market, according to Mackay, as advisers will be likely to turn to other, more traditional products, including WOL.
However, there are also significant hurdles in this market. IFA Keith Thomson, director of investment services at Blackadders, believes the cost of life cover, medical underwriting requirements, commitment to maintain premiums at all times, and the danger of relying on the performance of the stock market to maintain the premiums at the original level are all obstacles when trying to sell WOL. The potential for premiums to increase substantially after the 10-year review may also make the policy unaffordable or result in the life cover being reduced just when it is needed the most, he says.
A key problem that undermines the usage of a WOL policy is the cost augmentation and lack of transparency of knowing the actual cost of the life cover and the investment element being used on a year-on-year basis by life insurance companies. Clients that seek IFAs are often asset rich and income poor, Thomson says, adding, "other than restricting the annual premiums to the annual gifting allowance, a regular monthly premium can result in the clients' standard of living being adversely affected".
The problem most protection products suffer from with the majority of consumers being driven by the price of a policy also applies to WOL. Perks says: "What is crucial is that advisers need to take a holistic approach to better protection planning. At the moment, processes that rely on price comparison portals can be an obstacle to advice that is driven by anything other than price. However, we believe that holistic advice is the future of protection."
The WOL sector also faces other challenges. David Brunning, director at Brunning Newman Houghton, says that there is uncertainty in this particular area of the market as to the continuation of IHT, given comments made by the Conservative Party on abolishing it and the Labour Party's apparent commitment to keep it and to also increase the tax take. There are also the implications of the Finance Act 2006 and subsequent 'clarification' by Her Majesty's Revenue & Customs (HMRC) on trusts and IHT.
One problem with WOL is its reputation for being a product sold simply to generate commission to the detriment of a shorter/fixed-term assurance policy.
However, as Brunning reveals: "Greater scrutiny by compliance departments and the regulator reduced sales to what is a natural, compliant level.
"The product and its uses are still viable, and once we have seen some further clarification from HMRC on taxation of WOL policies in trust, sales will strengthen," he adds. Saying that, Brunning remains sceptical as to whether they will return to the
mid-90s boom.
Perks says there is a need to promote greater understanding of the benefits of WOL with advisers and consumers.
Advisers are integral to its popularity.
Perks emphasises that IFAs have a big role to play to ensure there is a distinct break from price-based comparisons towards more holistic financial and protection planning.
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"An adviser, with personal, often face-to-face access to their clients, is best placed to help educate them on all the aspects of their financial planning and lifestyle protection and WOL may play a big part of that," he suggests.
Thomson maintains that WOL still has a place in the market, particularly regarding IHT planning. "It would be a backwards step to see such policies disappear," he claims.
Market potential
Agreeing with Thomson, Brunning believes this market has potential, commenting: "There are tremendous opportunities in this area. As clients are now unable to immediately reduce their estates by more than £285,000 without incurring a lifetime charge, more IHT liability will remain in their estates, and they need to plan to meet this." He adds that the traditional method of joint life WOL remains viable and its use should increase.
Brunning believes that clients need to understand the huge potential impact of IHT on their estates, even quite modest estates where clients previously thought they were safe.
Thomson remarks that in order for IFAs to gain traction in this market it is essential that they should promote themselves better as specialists in the IHT planning field. He says IFAs should start; "Concentrating on solutions rather than sales of products, being professional rather than commercial, reviewing clients IHT positions every three years or so, and developing a personal relationship with clients and their family, thereby ensuring that IFAs can continue to advise the family and future generations."
People continue to remain loyal to this somewhat weather-beaten market that has experienced an overall decline over the past decade. However, the year ahead may still bring life into the old dog yet as the Government continues to fiddle with legislation rendering IFAs and consumers to look at more traditional products such as WOL.
