Guaranteed insurability options are a great way to ensure a client's policy matches their changing needs, but when re-broking, advisers must tread carefully, says Nick Kirwan
Re-broking used to be common practice thanks to falling premium rates and widening cover. However, now that premium rates for life assurance are more settled, critical illness (CI) rates have increased and the cover looks set to tighten, the decision to replace an existing policy is no longer so simple.
The decision to re-broke or not comes down to whether it makes sense to keep the original policy in force and top it up as required, or to recommend a replacement policy for the amount of cover the client now requires.
Best interests
On the face of it, some advisers may look to simplify this decision by asking whether the premium for the new policy will be lower and, unless it is only for life cover, whether the new policy offers at least equivalent cover. For example, some CI policies written in the past offer wider cover than those on offer today. However, using such a simple advice model may not always be in the best interests of the client. And in today's regulated world, that means it might not be in the adviser's best interests either, now that the protection advice given comes under the remit of the Financial Ombudsman Service (FOS).
Therefore, advisers need to give careful consideration to all aspects of advice, especially considering that the outcome - if it is not right - might make the difference between the policy paying out or not. To put it bluntly, if the claim goes wrong as a result of the advice given, the FOS could order the adviser to compensate the client by up to £100,000.
This is not intended to scare or put the adviser off servicing their clients' policies - as we all know the importance of regular reviews to ensure the clients' needs are met. It is important to consider the options and think about what the outcomes could be when altering the client's policy or re-broking it.
The client's health, for example, is an important consideration when planning the best course of action when their financial needs change, as they may not be as healthy as when they took out the original policy. Every adviser will know the importance of waiting until any replacement cover is underwritten, accepted and in force before the client cancels their existing cover. However, even this does not guarantee that things cannot go wrong. Advisers will need to ensure they apply the same care towards non-disclosure when re-broking as they would the first time a policy is taken out - arguably even more.
To illustrate how things can, and sometimes do, go wrong, consider the following scenario. An adviser recommends that a client replaces his existing policy with a new one because the adviser feels the new policy offers wider cover and better value for money. However, the client has suffered some health problems since taking out the original policy but did not disclose this to the new insurer. When the client makes a claim on the new policy, it will not pay out due to non-disclosure. Of course, the original policy would have done. There have been cases where this has happened.
If this occurred under the new regulations, the FOS may take a very close look at what recommendations were made and potentially order the adviser to compensate the client. Clearly, advisers now need to thoroughly document the reasons for replacing an existing policy and ensure they warn the client about the risks associated with any undisclosed changes in health.
Sometimes a policy will not fit the client's needs any more, especially if the term and sum assured cannot be altered, so the adviser may think that re-broking is the correct course of action. However, in these circumstances the adviser and his client need to decide if the original policy can still play a part in meeting the new financial needs - especially if the plan has, for example, wider CI definitions than are now available. This could be in the form of providing additional cover, as very few people have the full amount of cover that they really need.
On policies that can be altered, there would usually be the option to increase through a guaranteed insurability option (GIO) or a fully underwritten top-up.
Significant exclusions
GIOs have been available on life and CI cover for a number of years. They allow the policyholder to increase the sum assured, without medical underwriting after certain events, such as getting married, having a child, increasing a mortgage and getting a pay rise.
GIOs are a good way to ensure that the client's policy always matches their changing needs, but advisers need to be aware of the terms and exclusions when deciding if it is the best option for the client. Before recommending them, there are some important things to consider:
• Will the extra cover be subject to any additional exclusions? GIOs differ from provider to provider so the adviser needs to make sure the client is told about the exclusions relevant to their policy and be aware of what these exclusions might mean.
• What are the terms of the GIOs? Will the increase have the same CI definitions as the original policy or will they be the definitions that are currently available for new business. Policies vary.
• Has the client had any symptoms of a medical condition since the original policy was taken out? If this is an issue then make sure there is no pre-existing exclusion clause (PEC) on the policy.
• Has the client being diagnosed with a terminal or critical illness? If so, then exercising a GIO is likely to leave the increased part of the policy void.
Under the new regulations, advisers are obliged to point out any 'significant exclusions' on any cover arranged. Once again, great care is needed to ensure the client gets the right advice as these conditions may make the difference between the policy paying out or not.
Looking at some examples can help to better understand what the exclusions on a GIO could mean in practice. The scenario for all cases is that the client has increased their CI insurance through a GIO, having taken out a bigger mortgage. The increase was £50,000 which took the sum assured from £100,000 to £150,000. Each client is now claiming for a critical illness that meets the definition, but will the new full sum assured be paid out or just the original sum assured?
The answer is, it depends on the client's medical history up to the point that they exercised the GIO and whether the GIO contains a PEC as the table above shows.
If the adviser is at all unsure about their client's health when making the increase, then the best course of action might be to increase the policy using underwriting. This will ensure that the client can rely on the policy to pay out if they ever need to make a claim.
There would be nothing worse than a client increasing their insurance to match their new mortgage only to discover that when a CI claim is made, the increased part of the policy does not pay out. By which time, of course, they have already taken on the bigger mortgage. Getting the extra cover on a fully underwritten basis avoids this.
Changing a policy is not perhaps as simple as it first appears. However, by considering all the options and taking into account each individual client's needs, and the terms and any restrictions on the policy, advisers should not have any problems advising their client on the best course of action.
Nick Kirwan is director of protection marketing at Scottish Widows
COVER notes
• Advisers will need to ensure they apply the same care towards non-disclosure when re-broking as they would the first time a policy is taken out.
• GIOs allow the policyholder to increase the sum assured, without medical underwriting following certain events, such as getting married, having a child, increasing a mortgage and getting a pay rise.
• GIOs are a good way to ensure that the client's policy always matches their changing needs, but advisers need to be aware of the terms and exclusions when deciding if it is the best option for the client.
