In today's protection market advisers have a choice of term or whole of life cover to meet the needs of their clients. Until now, term cover has primarily been used to provide family protection, with whole of life (minus the over 50s funeral plans) left for high net worth clients with inheritance tax (IHT) planning requirements. But the landscape is changing.
The whole of life market has gone through a transition in the last few months in the run up to the Retail Distribution Review. The traditional unit linked part of the market has all but disappeared with providers redeveloping products or launching new ones. Out have gone unit linking and the investment element and in have come more products with a valuable new degree of simplicity. Removing the investment element has provided the opportunity to open up the distribution of whole of life products as both investment and insurance regulated advisers can now advise their clients on this product.
Whole of life cover is now being seen as providing a whole new range of opportunities in addition to IHT planning. The most obvious of these is to use the product for clients who simply want to be sure of passing on some money to their loved ones but who may not be in a position to do so unless they specifically commit to making regular payments for this purpose.
In today's world, many people are now relying on their homes to provide for them in their old age, using them to fund income in their retirement through equity release or downsizing. This therefore means passing the family home onto the next generation is less likely to happen. Those still planning to leave the family home to loved ones have the added risk that they may be forced to sell their home to pay for nursing care later in life. At the moment, people with assets in excess of £23,250 are required to meet all of their care costs themselves. Taking out a whole of life plan earlier in life could replace some of the lost inheritance that care fees could take away. If the house had to be sold to pay towards care fees at least there would be an inheritance for the children after their parents had passed away.
So using a whole of life plan could provide a solution for these situations by enabling clients to ring-fence money specifically for the benefit of loved ones. This doesn't have to be the sole use for which the plan is taken out in the first place. If clients are going to derive maximum value from the product then advisers should start thinking in terms of multi-usage.
For example, a whole-of-life plan could be used in the first instance to provide family protection during the early years and used latterly to provide a legacy for loved ones. Plans can be written under a suitable trust which will mean on death the sums assured will not be included as part of the estate but will pass directly to the client's chosen beneficiaries. This allows the money to be passed quickly to the right people at the right time.
Similarly, whole-of-life policies can be used for a range of business protection purposes such as loan protection, shareholder protection or key-person cover. They have built in flexibility to allow cover levels to be adjusted in response to business events via guaranteed insurability options. So a business owner could take one out initially to protect their business, flex it as the business grows and, once they have retired, switch it to an alternative usage.
As the emphasis on providing holistic financial planning is destined to gain momentum from the introduction of RDR, will we see the focus on multi usage whole of life really start to come into its own.
Jennifer Gilchrist
Senior Product Development Manager, Scottish Provident
