Dish of the day

Flexibility, or the need for it, is a key feature of modern life. In the workplace, we have flexible working hours which help workers to balance their work time with their social and family time. From banks, we have flexible mortgages which allow us to pay off chunks of debt or draw down more borrowing depending upon our circumstances. And from protection providers we now have flexible menu products which allow us to choose combinations of benefits according to need and change those benefits as time goes by and our circumstances change.

But what degree of flexibility do clients really want and need from protection products and do the current generation deliver on their promises? What does flexible actually mean? Some might say that menu products are flexible because they allow individual tailoring of cover. The dictionary definition of flexible is 'able to be changed easily.' Yet it is surprising that until recently most were not flexible at all ' even though many of them contained the word 'flexible' within the product name.

Part of the problem can be laid at the door of legislation. Products which attracted life assurance premium relief (LAPR), which were available before LAPR's withdrawal in 1984, had to obey quite stringent qualifying rules. These restricted the changes that could be made to the cover, the term, and the premium paid. Even after the demise of LAPR, the qualifying rules remained in order to allow maturity values to be tax-free, and most providers' systems were built to enforce these rules. How many customer service people over the years have had to explain to clients that they cannot change their policies, 'because it would become non-qualifying,' or because 'our systems won't let you do that'?

A new breed

In the 1980s a new breed of protection products was born, called the flexible whole of life. The aim of these was to give the customer the flexibility to vary the amount of cover they had. Unfortunately there were still many rules to go with this 'flexibility' and the reality was that making changes was often much more difficult than the marketing material promised.

Term assurance was traditionally inflexible. In fact, if a client wanted to change a policy it was usually easier just to cancel the existing plan and take out a new one.

In the late 1990s, the menu product was born and flexibility became a key driver for the development of the protection market from then on. In fact, the menu concept can take some responsibility for the impressive growth in protection sales over the last few years. They give IFAs and their clients the choice to include life, critical illness, income protection and unemployment cover within one plan, usually in any combination. They offer a choice to set up each of these benefits in a different way, for example with different terms, one to protect a mortgage for 25 years and another to protect the family for the next 10 years.

Putting everything together in one convenient plan means that clients save time and money. Money, because they remove the double charging that can occur if they were to buy separate plans. Time, because they only have to fill out one application form, one direct debit and go through one underwriting process.

What these products really offer the client is flexibility of choice, and this is actually different from flexibility to change. Like flexible whole of life, early menu products actually offered limited flexibility once the plan was in force. Making changes to the products was still difficult and, in some cases, system constraints still meant that it was easier to cancel the old and start afresh.

Chop and change

The menu products that have been developed since the late 1990s have often been developed on modern computer platforms that really do give clients flexibility to make changes easily. Clients can add benefits, increase benefits and generally alter the product at will. The only constraints that usually apply are due to underwriting considerations.

So it is important to separate 'flexibility of choice' from 'flexibility to change' when selecting a protection product. Flexibility to change should, in fact, be the baseline standard by which the flexibility of all financial products is measured. Take a client who wants death benefit to cover a flexible mortgage and wants to be able to alter the death benefit at will to match the outstanding balance of the mortgage. If the client intends to vary the loan amount on a regular basis then they will need the flexibility to do that within the protection plan. A menu product here with a wide range of choice of benefits, but with limited flexibility to change would not fit the bill as well as a single benefit product with the flexibility to easily alter the amount covered.

Read the small print

It is important to check the rules. Products may give clients the flexibility to change their plan but what are the limits? Can they make any changes they like or are there maximum amounts, or limits to the number of times a change can be made? Is the ability to change subject to extra underwriting? Death benefit obviously needs less medical underwriting at outset than critical illness or income protection. But some providers of menu products will ask applicants to be underwritten on the assumption they have applied for all the possible benefits rather than simply the ones they asked for.

A little more underwriting at outset can mean more flexibility to change later. It is worth pointing out, however, that when it comes to changing protection products, especially when adding or increasing cover, there are always likely to be some limits, or some underwriting needed. So total flexibility to change may not be achievable.

Flexibility and choice are now essential features on most protection products recommended by IFAs. Flexibility is often used as a differentiating factor in the advice process. But with flexibility comes responsibility.

After all, what is the point in recommending a product with flexibility if that flexibility is never used? For example, how many times have you used the number of guaranteed insurability options on a protection product as one of the reasons why it is being recommended? But how many times have you then gone back and recommended your clients exercise them?

As far as clients are concerned the need to make changes to a product may not only be triggered by traditional lifestyle events like getting married, moving home or having children. True flexibility means that clients can easily make changes whatever event triggered the decision.

For example, the moment of realisation about the need to increase their protection could come for a couple on their annual skiing holiday. It could be just as they step off the ski lift that they suddenly wonder what would happen to their lifestyle if they had a skiing accident and had to spend a long period of time off work recovering. They might want to add income protection to their death benefit at that point.

Or it could be a conversation a young woman has with her personal trainer about healthy eating and the prevention of cancer, that makes her realise she needs more critical illness cover.

Alternatively, a middle-aged man with a family may decide to review his protection arrangements while watching a hospital drama which shows a businessman having a heart attack.

It would be impossible to have a product that contained guaranteed insurability options on ski lift realisation, personal trainer conversation or television watching, but if the plan they have does not have the flexibility to let them do this easily then it is not truly flexible.

How to choose?

So, with the many products available in the market at the moment, how can advisers identify a good flexible product? Industry databases such as Aequos measure product flexibility and the individual product literature will describe the flexibility and the options that are available.

But the reality is that the only way to see whether the product will deliver on its flexibility promise is to test the flexibility out in practice.

Using your own client bank, you can identify recent clients whose circumstances have changed. Then see how easy it is for them to change their protection products. How long does it take? What financial limits are there? What underwriting has to take place? And what is the percentage of changes that go through successfully?

Flexibility of choice and change are the two foundation stones upon which many modern menu products are marketed. While most live up to the 'choice' promise by including wide ranges of benefits and options at outset, many have not been on the books for long enough for the 'flexibility' later promise to be tested.

Roger Edwards is director of products, new protection business at Scottish Life