The long-awaited scrapping of over-70s regulation is expected to result in increased sales of term assurance, but not necessarily via advisers, writes Samantha Downes
The rule that restricts the sale of term life insurance to anyone over the age of 70 has long been branded both arcane and irrelevant. So, it was with a bit of a whimper that the industry greeted April's news of it being scrapped.
The decision to remove the rule was prompted by Ed Balls, economic secretary to The Treasury. In April, he told the Financial Services Authority's (FSA) principles-based regulation conference that the rule should be scrapped.
He said at the conference: "The FSA and The Treasury have been consulting jointly on deregulatory measures to simplify the rules on the forms of life insurance that can be sold through the FSA's Insurance Conduct of Business (ICOB) rules, with a view to removing conditions on age and the term of policies."
He added that he had written to Callum McCarthy, the FSA's chairman, indicating that The Treasury intended to make changes to legislation that would allow the FSA to remove the age conditions. Balls, himself prompted by calls from the industry, felt the rule was no longer relevant.
The rule restricts the sale of protection insurance to anyone over the age of 70. The only advisers allowed to do so are those regulated under the Conduct of Business (COB) rules. Advisers selling general insurance, those regulated under ICOB rules, are unable to sell the policies because they mature beyond the age of 70. This means it must be sold under more complex investment rules rather than the standard rules for life insurance, even though there is no investment element - although the sale of long-term care policies will continue to be restricted to those under the age of 70.
The removal of the rule means ICOB advisers will be able to sell life assurance to anyone that would be over 70 by the time the policy has expired. If it is lifted, it means the FSA will be applying the same regulations to the sale of life, critical illness and income protection insurances where there is no investment element.
The FSA is expected to make a final decision in August this year - although it had originally been considering upping the age limit to 80. Then the regulator is expected to announce an immediate lifting of the rule, but, for now, it is consulting with the industry on the implications of doing so.
Julie Smith, research manager at AWD Chase de Vere, says de-restricting the sale of term assurance made complete sense. She points out the £2.5trn life insurance protection gap. "In the long run, it will be easier for a wider range of people to gain access to this type of cover, which is obviously good news," she says. "With people living longer and mortgage terms increasing to allow first-time buyers to get on the ever elusive property ladder, having the rule no longer makes sense."
Kevin Carr, head of protection strategy at LifeSearch, says: "So many more people are taking debt later in life and working longer, as well as retiring later, so it's silly to restrict their access to life insurance products.
"Many companies, including LifeSearch, have campaigned for several years to scrap this rule and we are very pleased that the FSA is now taking action. We will be submitting a detailed response to the consultation setting out our views in full."
Carr also says the rule has long caused unnecessary confusion, so the change will be "a refreshing opportunity" to help those with debts protect against the financial implications of death.
He also argues that lifting the rule means the sale of the products are more likely to fit in with the principle of Treating Customers Fairly.
He adds: "Consumers affected by the rule will also have far greater access to the most suitable products."
The Association of British Insurers, which also had been pressing for the rule to be lifted, also claims rising house prices made the rule arcane.
Ian Smart, technical product manager at Bright Grey, adds: "It really was a bit of a silly rule. Any policy maturing after 70 was considered an investment, and the rule was to prevent the mis-sale of cover."
With longer mortgage terms and the average age of a first-time buyer now in the mid-30s, some advisers were finding their hands tied.
"It's down to treating customers fairly as well. You may get a 35-year-old taking out a 40-year mortgage, which would make them 75 when the policy runs out. This is increasingly becoming more common."
Smart predicts that it will be smaller advisers that will really benefit: "Larger companies on the whole have both COB and ICOB advisers, but smaller general insurance practices won't. Now they don't have to lose the business."
He does not see a sudden surge in demand for life insurance, as "this is something that will grow during the next few years rather than tomorrow".
Rod McKie, head of protection marketing at Aegon Scottish Equitable, also believes the real impact of the removal will not be felt for several years.
"In some ways, it's very big news but it's really an unecessary bit of regulation being removed. This change was needed," he says.
While it will not mean new products, it may mean an opportunity for new providers to get in on the act. Smith says that, while smaller advisers will benefit, the removal will more than likely open the doors for banks and building societies.
Mark Jones, protection manager at Friends Provident, says: "There will most certainly be an increase in sales, but we believe it won't kick in for a few years yet. The current older generation do not have the same kind of financial pressures today as those in their 40s or 50s are likely to face."
What the change does is future-proof life insurance to take into account the need for cover at a later age.
Another potential growth area for advisers, especially those specialising in tax, is through Inheritance Tax planning.
"You could see more sales of the decreasing term assurance taken out to cover the seven-year rule," says Jones.
He does not agree that the rule will necessarily benefit smaller advisers, however: "A lot of smaller ICOB advisers are in the process of becoming COB-registered anyway."
Both Jones and Smith agree the removal of the rule will also drive down prices."A lot of providers don't have products that cover over 70s. If anything, things will get more competitive not less," Jones explains.
However, this could have more odious implications for the industry, admits Smith. She is concerned that sales of the cover could shift the whole emphasis of term assurance to cost alone, rather than consideration being given to features and flexibility of a contract as well.
Carr, in the meanwhile, is hopeful the FSA's review of the rule could open the door for a review of other forms of life cover.
He says sales of life insurance need to be looked at again: "In addition to term assurance, we would encourage the FSA to consider including non-investment-linked whole of life products within the ICOB regulation, as such products also have no investment element."
He adds: "If it's pure insurance, regulate it as pure insurance under the insurance rules. If it's investment, or even partly and investment, regulate it as an investment under the investment rules."
Samantha Downes is a freelance journalist
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