Despite a fall in sales and the continued popularity of term plans, Angela Faherty discovers that whole of life products still present a viable solution in the protection market Click here to download pdf
In recent years the whole of life (WOL) market has teetered on the sidelines as sales of term assurance policies continued to soar. While the rising popularity and continued affordability of term contracts has certainly contributed to this decline, the poor performance of the investment market has also played a part.
The decline in the WOL market can be seen by the rapid decrease in sales over the three-year period between 1998 and 2001. In 1998, sales stood at a total of 415,000 policies but had dropped to 224,168 by 2001.
Despite this downturn, the market is starting to show promise. According to figures from Swiss Re Life & Health's Term & Health Watch 2003, WOL sales actually rose to 254,357 policies in 2002 – an increase of 13.5% on 2001. However, this figure remains fairly low in contrast to the sales achieved in 1998 and predictions are that sales of WOL policies have remained fairly stagnant over the course of 2003.
Complexity
While WOL sales are unlikely to escalate at a rapid pace in 2004, insurers are confident the market will remain steady and that products will continue to present clients with a viable protection proposition.
"Whole of life products still have a valid place in the market. The cover can never be taken away from the client and there is a guaranteed payout in the event of death. For those looking for this sort of protection, WOL provides a great solution," says Shelley Robertson, protection brand manager at Skandia.
Robertson's view is supported by the industry. There is widespread belief that products will continue to have a place in the protection arena, however, there is also agreement on why WOL sales have not been booming.
"There is no denying that whole of life cover is a good solution. However, one of the reasons for advisers' perceived reluctance to sell the product is the complexity surrounding the cover in terms of explaining the review process and the investment element," says Doros Nicolaou, IFA at Millfield Partnership.
The complexity surrounding WOL products has meant that some advisers prefer term life cover, as it is a simpler proposition to understand and sell. Evidently, the continued success and growth of the term market would suggest that a relatively simple sales message and the ease of purchase also appeal to the consumer.
Explaining the workings of the investment market and the impact this may have on unit-linked WOL products can be complicated, and providers are aware of the challenges the product presents.
As a way of combating these issues, Skandia launched two controversial new WOL products in 2001; guaranteed WOL and rolling term WOL cover. The guaranteed option was based on a concept in Ireland called T100, which offered life cover until the age of 100. Skandia adopted this format but let the cover run for the length of the policyholder's life.
Product development
Skandia's rolling term WOL cover is unique as it is not unit linked and premiums are reviewed every 10 years, making the sales process more straightforward as advisers do not have to get bogged down with the intricacies of the investment market and its performance.
While Skandia has paved the way for further product development, the current nature of the market means further innovation is unlikely to happen soon. Bright Grey's launch into the protection arena last year meant a new entrant in the market, but the insurer decided not to include a WOL product in its protection plan.
However, while Bright Grey has no plans to develop a WOL product yet, Roger Edwards, products director at the insurer, stresses support for the rolling term contract offered by Skandia.
"At the moment we have no plans to enter the whole of life market. However, if Bright Grey were to look at developing a whole of life product, then we would favour the style of Skandia's rolling term cover. It is not linked to the investment market and I think this style of product has a future place in the market," says Edwards.
While the long-term success of Skandia's new products has yet to be seen, advisers need not shy away from the WOL market. Instead, its complex nature means that it is very much an advice-based product that offers growth potential for all advisers working in the protection market.
"The fact that whole of life cover may not be as simple to understand and sell as term assurance need not be a hindrance for advisers, instead it presents them with a chance to grow this market as whole of life remains more of an advice-led product," says Nick Kirwan, head of protection and product development at Abbey for Intermediaries.
The emphasis placed on the need for advice in the WOL market bodes well for all protection advisers. Despite the continued success of term assurance products, as with all aspects of the protection market, the need of each individual varies and this is where WOL policies can play an important role.
"As sales of term assurance products continue to rise, it is proving to be a more popular proposition for many consumers. However, this is not to say that in all circumstances term cover is the best product. There are many examples where WOL is and will continue to be more suitable," says Edwards.
Although Bright Grey does not offer WOL within its protection range, Edwards concedes that the product is a good solid solution for the post-retirement market and it is older clients that many providers market the product to. Similarly, the large majority of WOL sales are confined to the over 50s market.
Growing market
The Homeowners Friendly Society, for example, generally tends to market its WOL business as an over 50s solution. It believes that consumers in this age group are less inclined to have dependents or mortgage repayments to meet and will start to consider what they want from their retirement as they approach their 60s. In addition, demographics show that this is a growing age group so meeting the needs of these individuals is essential.
"The over 50s is a growing market in terms of both volume and value and the focus needs to be on this potential. There are many concerns an individual in this age bracket may have, whether Inheritance Tax (IHT) planning, debt management or simply funeral expenses, whole of life can help," says Helen Graham, marketing development manager at the Society.
While WOL has retreated to become more of an IHT planning tool, its use in this area can be clearly seen. The increasing elderly population coupled with the rising number of homeowners and high house prices means that using WOL as a way to mitigate IHT liability is likely to continue.
Predictions
"One of the key growth drivers for the whole of life market is the growing elderly population. Add to this the fact that the government are unlikely to reduce the Inheritance Tax rate or thresholds and the number of people likely to be affected continues to grow," says Robertson.
Graham also believes that the trend for using WOL for IHT planning purposes will continue. However, she adds that even preparing for something as basic as funeral expenses can help the market grow. Indeed, in Swiss Re's report, predictions have been made for sustained growth in the number of WOL policies sold with modest sums assured to pay for funeral expenses.
As the target market for WOL policies is, in the main, focused on consumers in the over 50s bracket, the long term care (LTC) conversion element included on many WOL plans can also prove to be highly beneficial.
Abbey for example, offers a LTC conversion option on its Pegasus WOL product. The proposition is simple; it provides clients with the opportunity to use the plan as a means of supporting their ill health in retirement.
"The long-term care conversion element on a whole of life policy is very important because a person's reasons for taking out a plan in their mid-40s will no longer be applicable when they are 60. At this stage, deteriorating health and a way of funding this may be more important as the kids will be long gone and the mortgage will have been paid off," says Kirwan.
Kirwan adds that one of the benefits of the review process on WOL plans is that the changing needs of consumers can always be addressed, regardless of the age group into which they fall.
"The review of the policy should also be a review of the policyholder's life. A lot can change in 10 years and advisers should help their clients address this by looking at how the individual's priorities have changed," he says.
Looking ahead, the WOL will continue to have a place in the protection arena. Sales are unlikely to grow at the rate of term cover, but the product remains a valid proposition in the market. The ageing population and the continued rise in the value of property bodes well for future sales as IHT liability becomes a real threat to many people and understanding how WOL can help to mitigate this risk is where advisers play an important role.
