Best of both worlds

While the protection market is traditional in much of the cover it offers, it is also a market which is quick to spot opportunities and make the most of them.

The concept of 'rolling' term assurance, entered the protection arena last year. Since the word 'rolling' means 'continuing or progressing', rolling term refers to what happens to the period of cover under a life or critical illness (CI) policy.

Rolling term can be best explained as a hybrid between term assurance and a whole of life policy. It combines parts of each to make this new type of term. You can begin by comparing rolling term to a maximum cover whole of life policy. At the start, both give the client cover and a premium that is guaranteed for 10 years and both also offer cover that is guaranteed for life ' irrespective of what happens to a client's health along the way.

A unique feature

So far, so good ' but what makes it different from a whole of life policy? Rolling term policies have one feature that sets them apart and makes them more aligned to term assurance contracts. They are not unit-linked and so have no investment element or fund performance to consider when the premiums are recalculated and the term is 'rolled.' This means they work in a way that is similar to renewable term assurance ' where the new premium reflects the cost of the new cover without any investment aspect. Therefore, rolling term policies combine the guaranteed insurability of whole of life plans and the non- linked characteristic of most term assurances. As a result, rolling term takes the best of both worlds.

Let us look at an example of how it works. Case study one shows a client who chooses to keep the same level of cover throughout and how the monthly premiums would rise as the client rolls the cover every 10 years.

Rolling term premiums will increase each time the policy is rolled because:

• The client is older (and the cost of cover increases with age).

• The new cover and premium is guaranteed for a further 10 years.

In that respect they work in the same way as both maximum cover whole of life policies and renewable term assurance policies.

Keeping costs down

The reason why the 'rolled' premiums are lower than for new policies is because the setting-up costs have already been taken into account. For example, only incremental commission is paid, rather than a second amount of new commission.

Not all clients will want to keep their cover at the same level for the period of cover. For those who choose to use the inflation option, each time the cover increases, the term rolls to guarantee the new cover for a further 10 years. This means that if the client uses the inflation option every year, the policy will never come to the end of the 10-year term, as each year the cover increases a new 10-year term will start.

Thanks to their ability to offer guaranteed cover for life, rolling term polices are priced in a similar way to whole of life policies. This means they should be most directly compared with these policies.

A competitive choice

Rolling term compares favourably with maximum cover whole of life plans. However, it also could be considered to be a simpler sale than these more traditional polices for two reasons:

• It has no investment content, so fund selection is not part of the recommendation process.

• The cover lasts for 10 years at a time, while many maximum cover policies only guarantee the cover for the first 10 years and after that, at shorter intervals only.

Rolling term is also competitive against renewable term assurance. While it may not be the cheapest option, it's worth bearing in mind that rolling term cover does not have a final end date to the cover, as renewable term assurance will have.

Because rolling term policies offer guaranteed insurability, they also offer policy terms that are guaranteed for life too. As a result, the insurer has the opportunity to improve a client's cover at a later date if they choose, but the insurer does not have the legal right to worsen the terms of any existing insurance policy. The same applies to rolling term policies, in the same way it applies to whole of life plans.

It is too soon to tell how profitable these plans will be in the long-term. However, given that rolling term closely follows maximum whole of life cover (and these have been in the market for nearly 20 years), one would expect they should be similarly profitable. The only difference is that rolling term cover is not unit-linked.

Provided the insurer is confident that it can achieve the anticipated 'return' on the premiums it receives, then the future looks bright for rolling term cover.

Shelley Robertson is protection brand manager at Skandia Life