Life and health protection is not a new idea, it has always been important. Most people have some l...
Life and health protection is not a new idea, it has always been important. Most people have some life cover - according to research1 some 62% of families have some life cover. The problem is that much of it relates to mortgage protection and far less to the full panoply of protection products that are available in today's marketplace.
The point is best made by looking at the underlying figures. The survey shows that just 15% of men have protection - life cover - on their own lives, with only 8% of women saying they are in a similar position.
So it is understandable to see in the national press a significant amount of coverage about the need for life cover, and the role of critical illness and income protection products. Not only does the media know that there is a lack of cover out there, but also the public is keen to read about the experience of others, through case studies, in order to help it make up its mind about additional protection.
Growing awareness
Most would agree that life assurance, critical illness cover and income protection are key protection products that people should have. Customers are becoming more aware of this because the media has highlighted the issues for some time. In addition, people are more accustomed to hearing about these products, how they benefit them and more importantly, the need for everyone to be adequately protected.
Life and health protection is the foundation of financial planning and it should be foremost in an adviser's mind. How many of the customers have you advised to buy protection have then been unfortunate enough to suffer a critical illness or long-term sickness? Naturally they will be grateful that you arranged the policy which has given them a financial cushion to cope or adapt to what has happened to them. There is no better advert for the need for protection insurance than someone who has experienced a claim. The majority of people need some type of protection, while certain groups have more acute needs than others.
Young families
The most obvious market for protection are families with young children. Anyone with dependants should have enough life cover to be able to provide their dependants with sufficient income in the event of their death. But how much is enough? When calculating the amount of life cover to take out the Life Insurance Market Research Association (LIMRA) recommends that people take out 15 times their annual salary less any death in service benefit provided by employers. Using the UK national average salary of £20,9192 the average recommended level of life cover would be £313,785. The premium for this amount of term assurance cover on a joint life basis would be £37.77 per month3. If they had to claim on the policy, the surviving partner could then invest the lump sum to produce an income. For example, if the lump sum were invested to produce income at an assumed rate of 4.5% per this would produce an income of over £14,000 per year.
Protecting the breadwinner is the first step, as their death will have the most serious consequences on those left behind. There may be little or no income coming into the household and although in many cases the mortgage will be paid off, there will be many other bills to settle. This could leave the surviving partner with no option but to start work or to increase their working hours. The opportunities available to replace the breadwinner's salary are slim and if it means leaving young children with a childminder, this would only add to monthly outgoings. This could mean that the family may be forced to move from the family home in order to find accommodation with lower running costs. One possibility would involve moving from a house in one area to a flat in another.
What about the spouse?
However, do not assume that the only person who needs cover is the main breadwinner of the family. If the other partner were to die, how would the breadwinner cope? They might want to cut down their hours in order to look after the children and this would invariably mean a drop in salary. Or if they continued to work full time, they may need to make arrangements for the children to be cared for after school and during the holidays, they may also need help with the household chores.
All of these options cost money. Our recent research showed that to pay people to do the household chores undertaken by the main carer would cost up to £378 a week.
Since the 1970s, the number of lone parent families in the UK has been increasing. In 1998/99 the proportion of families headed by a lone parent stands at 23%4. The rising number of lone parent families in the UK makes the need for life cover even more important as the death of the lone parent can have a dramatic effect on the children emotionally as well as financially. It is also important to ensure that adequate cover is taken out by an absent parent who is providing financial support for his/her children, because if they were to die, this vital source of financial support would cease.
Often people will insure against their early demise, but surprisingly few consider how they would cope financially if illness or injury prevented them from working. For an employed person, sick pay or State benefits are unlikely to match earnings. Most employers only pay employees their full salary for a limited period if they contract a long-term illness. Those who are self-employed will see their income stop quickly if they are unable to work for more than a few weeks. The 'it won't happen to me' culture thrives, despite the fact that you are 15 time more likely to be off work for six months or more due to accident or illness than to die before reaching age 655.
Many people will protect loans or major purchases with some form of payment protection, but often do not consider protecting their main source of income in the event of prolonged sickness or disability. Putting in place income protection insurance to protect the main source of income or housepersons' cover to protect the partner who stays at home can relieve the financial burden on a family already under stress.
Critical illness
Critical illness cover gives families peace of mind, knowing that they will be able to afford proper care for themselves or their children, be less of a burden to those who may have to care for them and to be able to get as much out of life as possible without having to worry about bills and any extra costs. If either partner or a child suffers a serious illness the family finances will invariably suffer as well. A cash lump sum paid at this time could be used in a variety of ways. For example:
l To make sure that all their loans are paid off, including the mortgage.
l They may need to adapt their house or car.
l They may need to pay for nursing care or recuperation costs.
l They may want to go on a holiday to recuperate.
l They may need to change to a less stressful job.
l Their partner may need to take time off work to care for them.
The State benefits that an individual is eligible for may amount to very little. What is more, some State benefits have become harder to claim - and may be taxable as well.
A widowed mother with two children would receive a one-off lump sum payment of £1,000. She may be eligible for the widowed mother's allowance of £67.50 per week plus £9.85 per week for the eldest eligible child and £11.35 per week for the younger child. This comes to £88.70 per week or £4,612.40 per year from the State (excluding the £1,000 lump sum). This represents a 78% drop in income before tax if her late husband was earning the average annual wage of £20,919 a year.
Financial family planning
Housewives have a tremendous financial value to the family and should be protected against death, critical illness and long-term illness.
In 1998 the number of children born in the UK totalled 717,0004. These new additions, whether to existing or first time parents would still have an effect on the families. Parents would need to not only adapt their social lives, but also to restructure their finances to provide for and protect their family and ensure their dependants are cared for in the event of the death, disability or long-term sickness of one or both parents.
Raising a family is an expensive business. While it depends a great deal on the age and number of children as well as on the household income, the average spent on items for children each week is £109. Over 18 years that means parents on average spend over £132,700 raising children1. (This figure has inflation added at 3% per year to show the true value over 18 years).
The good news is that life assurance premium rates have been decreasing steadily over the last five years. It is now more affordable for couples with families and those planning to start a family to provide peace of mind by taking out life and health cover to protect themselves and their dependants. With over 700,000 children born in 1998 there are a lot of new opportunities available to discuss with your clients protection needs, particularly if they are first time parents.
Ronnie Martin is protection event director at Legal & General
Sources:
1. Legal & General 'Value of a mum' 2000 Edition.
2. ONS New Earning Survey 1999.
3. Legal & General, level term assurance with terminal illness cover premium, Joint life first death, both aged 30 next birthday, 25-year term, sum assured £313,785.
4. Office for National Statistics Population & Vital Statistics 2000.
5. DSS Social Security Statistics 1997.
