Walking a tightrope

Recent research from Scottish Provident revealed that most Britons are walking a 'financial high wire' without a protection safety net, believing the State will look after them if things go wrong. The High Wire Britain research paints a fascinating view of what is seen as a reasonable standard of living in modern Britain, but also demonstrates an astonishing complacency in the face of potential threats to that standard of living. It could be described as a wake-up call for all those people who have not taken out any protection, and also demonstrates the opportunity IFAs have to increase their protection business.

Standards of living in the UK have never been higher and nine out of 10 people expect things to get even better over the next 10 years. But despite this mood of optimism, nearly 70% of people admit their standard of living would be put at risk if they became sick and could not work, or if they suffered a serious illness. But 60% have taken absolutely no action to protect their lifestyles, 81% have no critical illness (CI) cover and 88% have no income protection. This is the protection gap and it needs to be plugged.

New competition

Providers, especially new entrants such as supermarket chains and direct internet companies, are keen to offer products to exploit the business opportunities offered by this protection gap. But their offerings are still largely sold on price. On the one hand this is good for the consumer because they can get access to value for money products, but on the other they are not getting any advice, so they may not be buying the cover which best suits their needs. In the scramble to fill this protection gap, IFAs need to rely on advice to differentiate themselves from price-only protection providers.

A good example would be someone who needs life assurance. They can now buy cover when they are doing their Saturday shopping. All they need to do is pick up a leaflet at the checkout, fill it in and they are covered. But even the most basic term assurance can generate an inheritance tax liability. And asking the check out assistant to explain the inheritance implications of a term assurance product would draw a blank stare. Customers need to check out the protection advice that only an IFA can give.

In order to turn protection into the huge income stream it has the potential to become, IFAs need to ensure that advice, not price, drives the protection sale. After all, advice is what being an IFA is all about and it is advice that drives the business forward and generates the IFA's income.

Familiar approach

In fact, the approach to the protection sale can take the same form as the IFA's approach to investments and pensions. For example, with pensions the client will decide what income they want to retire on and the IFA will work out the fund needed at retirement to provide that income. If the client cannot afford the premium to build that fund, the IFA's advice will be the same. 'In order to retire on £x thousand per year you will need a fund of £y.' They will then need to work with the client during the annual reviews to ensure that the original recommendation, that is the target retirement fund, is achievable.

Protection has developed differently. And, whereas pensions and investment advice will always involve the maximum golden future amount, people often only purchase protection in small amounts, perhaps to cover their mortgage. This is because the subject does not reflect the future fulfilment of ambition and, generally, people would rather spend their money on something that gives them pleasure or a future return, we have become conditioned to believe that cheapest is best. And that 'some' rather than 'what we really need' is sufficient.

In order to realise the potential of the protection market, the IFA should apply the same principle to the protection sale as they do to the pension, investment and mortgage sale. Advice has to drive the sale and ongoing reviews have to keep the client's protection portfolio at the level they need.

So, how can IFAs put advice back into the protection sale? IFAs may benefit from following a number of protection guidelines to ensure that advice is the key factor in the sale.

First, challenge the traditional price-driven approach and make a tailor-made advice solution for each client. For example, David and Jane are both 35 next birthday, non-smokers and have a family. They need life cover and critical illness cover for £100,000. The price-driven approach is to look on ExWeb and consider which provider is coming in cheapest for a joint life policy, which pays on death or earlier critical illness. Assuming guaranteed rates the premium will be £69.12 per month.

If price is the only consideration then that is the end of the story. But to add value to the sale it is necessary to consider whether a death or CI benefit is really right for a couple needing family protection. Unless it is for a loan (which only needs to be paid off once), then perhaps it is not. The payment of a CI claim will be valuable at a difficult time, but it will also leave them without any life cover.

Following an illness it may be difficult to get more life cover. But the need for life cover in the future will still be there, especially as people can live for many years following an illness.

A better proposal

The advice-driven solution would be a product that could combine separate death and critical illness benefits within the same plan. This means the payment of the CI benefit will not result in the life cover being cancelled, leaving it in force until it is needed.

What is more, IFAs can demonstrate value for money because the cost of such plans is only slightly more. In this example, the client could pay £81.74 for a policy with two potential payouts ' only £12.62 extra.

This moves the sale away from the traditional price benefit to an advice-driven combination.

But advice can challenge this further. Is a joint life policy really the best? What happens if the couple needs different amounts of cover each? And what happens if they divorce and want their own protection benefits?

Two single life policies, each paying £100,000 on death and critical illness, would give David and Jane extra flexibility. The combined cost of the two plans, with four potential payouts, is £86.90 ' only £5.16 extra.

So the traditional approach would have seen David and Jane buy the cheapest one benefit plan they could find. The advice-driven solution shows they can have extra flexibility and much more financial benefit for only a little extra premium. And the IFA could alter the benefit levels if necessary to keep costs at a similar level.

Second, IFAs should be recommending the maximum level of cover and benefits clients actually need and review that frequently.

When putting together a pension portfolio, advice will focus on the fund required to create the desired level of pension. A client would never be advised to make do with a lower target figure. The recommendation will stand and the IFA will regularly review the portfolio so that even if the client cannot afford the necessary funding now, the contribution will be reviewed annually and increased when it is affordable.

This has to be the way that an advice-driven protection portfolio is put together as well. Rather than using the somewhat arbitrary 'rules of thumb' that exist ' for example, 10 times salary for life cover, and five times salary for critical illness ' calculate the maximum amount of cover needed by taking into account all financial commitments, current and future income and capital needs. This is then the recommendation whether the client can afford the cover or not. If they cannot, then review the protection portfolio every year until the maximum level of cover the client actually needs is provided.

Modern menu-based protection products with real flexibility will allow IFAs to implement this two-stage approach. A menu means they can offer an individually tailored solution at the start and use the built-in flexibility to carry out the ongoing reviews.

The research shows that despite their high standard of living, Britons have inadequate financial protection in place. The protection gap offers a huge opportunity for IFAs to grow their business. But advice must be at the heart of the protection sale. The flexible menu of benefits approach gives IFAs the ability to turn a commodity, price-driven product into an advice-driven personal solution. It also allows IFAs to apply their strength to the protection market ' their ability to give advice.