Despite more families facing huge inheritance tax bills, whole of life, which provides cover against death duty, is in the doldrums. But all is not lost, writes Johanna Gornitzki Click here to download pdf
The whole of life (WOL) market has failed to impress since its heyday in the late 1990s, when around 400,000 policies a year were sold.
Latest figures from Swiss Re's Term & Health Watch 2005 saw WOL sales drop from 230,698 in 2003 to 219,927 in 2004 - even lower than the 2001 slump.
And while no official figures for 2005 have been published yet, feedback from providers suggests the WOL market has continued to experience an equally appalling result.
The sector's failure to break this negative trend came as a surprise to industry experts, many of whom had forecast that sales of WOL would be on their way up due to the increased need for help to combat inheritance tax (IHT) liabilities.
This assumption derives from the fact that WOL has two main functions - cover for funeral plans and protection against IHT. The latter was in the past mainly seen as a tax affecting only the rich.
However, with house prices continuing to climb, pushing more and more people over the £275,000 IHT nil rate threshold, it has become a tax for middle Britain.
Consequently, it was expected that covering the estate with WOL would become the norm rather than an exceptional consideration.
However, despite this expectation, sales have failed to recover and lack of knowledge is partly to blame. In the past, most families could inherit much of their estates without incurring an IHT bill.
This is no longer the case. However, few people are aware they might face a massive tax bill if their mother or father died.
Peter Chadborn, principal of CBK, said: "While estates may be worth a lot more on paper than they used to be, most people are not aware that they are liable to inheritance tax.
"People from well-off families have had to deal with inheritance tax issues for decades, but the majority of people now liable to this tax are perhaps the first generation in their family to experience it."
Moreover, people do not like to think they are going to die - and with this denial comes the refusal to plan for death.
Those who do try to prepare may also be conscious of the need to prepare for their own retirement.
With the Government endorsing the need to save for retirement, the competition for a share of the consumer's wallet has become fierce - and parents may be torn between providing for their own retirement and ensuring their children do not face exorbitant inheritance tax.
Helen Collins, IFA marketing manager at Liverpool Victoria, says: "There is certainly a conflict between having money for retirement and leaving money for beneficiaries."
Another factor hindering sales is the cost of cover. Reviewable policies leave doubt as to what the premium will be in the future.
"They may be cheap when first bought, but as premiums almost certainly go up when reviewed, they could end up very expensive.
This means the UK's ageing population may end up with massively inflated policies when they can least afford it.
The majority of WOL policies also contain an investment element. These unit-linked WOL products depend on the performance of the stock market and the payout is therefore uncertain.
This means if it is used as an IHT tool, policyholders could end up with a payout smaller than their IHT bill.
Guaranteed WOL products - which have no investment element and a fixed price - are more reliable. These are, however, very expensive and, depending on medical history and age, may not be obtainable.
Compared with other protection products, WOL is very expensive. This has worked as a deterrent for many people considering taking out the cover and has resulted in quashing new interest in the product.
As Penny O'Nions, principal of the Onion Group, explains: "Many national newspapers have turned their attention to the ideal methods to mitigate or assist in the mitigation of inheritance tax.
"As a result, there has been more interest in whole of life. However - due to cost mainly - this has not necessarily resulted in much take-up."
The falling sales are not down wholly to consumers turning their backs on the WOL sector - lack of adviser interest also has a part to play.
Paul Bennett, protection marketing manager at AXA, believes the drop in WOL sales has been a direct result of the declining number of advisers actively selling the cover.
He also believes the demise of a number of tied sales forces has contributed to this decline. Sharing Bennett's view, Brian Sceats, head of marketing at Lincoln, argues that the lack of interest among the IFA community is due to intermediaries' reluctance to move into uncharted territory.
"Advisers are more comfortable with the more familiar (to them) term option, and they are therefore not considering all possibilities," he says.
Advisers' lack of enthusiasm for WOL business was further exacerbated in the early days of this decade when the fall of the stock market saw investment products experience poor returns, says Sceats.
He says: "They are now cautious when it comes to investment-based products following the 2000-2003 stock market downturn."
Additionally, in the case of IHT, there is also adviser reluctance to practice in this area as it is perceived by some intermediaries as too complicated.
For those advisers who do look at IHT planning, they also need to consider more than just protection products since there are other ways to offset this type tax, which Bennett admits.
He says: "Until now, the adviser market has probably been more focused on other methods."
The lack of focus on WOL hasn't just had an adverse effect on present sales, it has also created a barrier to increasing the market size as many advisers now lack expertise in this area.
Further aggravating the shortage of WOL advisers in the market is the fact that Conduct of Business (COB) advisers are the only advisers allowed to advise on the product due to the investment element attached to it. Protection-only intermediaries, who would naturally give advice on all sorts of protection products, are therefore prohibited from doing business in this area.
This is a worrying trend for the WOL market because advisers are pivotal to its survival.
Chadborn points out: "Clients will only learn about the advantages of taking out WOL cover by speaking to an IFA."
One of the main challenges for the market is to try to encourage more IFAs to enter the WOL arena. In theory, this should not be too hard as there are great business opportunities. As IHT liabilities increase and property prices continue to escalate, more people are likely to consider WOL as part of their financial planning exercise.
Bennett believes advisers will notice this opportunity. "We expect whole of life to benefit from the increased profile of inheritance tax planning, and we expect to see sales of whole of life grow in the advised sector of the market," he says.
There is, though, uncertainty about what will happen to this sector over the next 12 months. Some believe sales will increase while others think the market will remain merely sustainable. No matter what happens, it is certain adviser interest is crucial if sales are to return to the heights they reached in the late 1990s.
The WOL market may never outsell any of its sister products but it could, if marketed correctly, enjoy healthy sales figures. Sceats sums it up: "It is unlikely to outsell term, but once advisers are re-apprised of the benefits we expect the market to grow."
