Alan Lakey, director of CIExpert, examines several scenarios where the decision-making of the Financial Ombudsman Service impacts on both advisers and clients when it comes to critical illness cover.
I recently wrote about how insurers price stand-alone critical illness plans compared to accelerated life plans and how the fear of adverse Financial Ombudsman Service (FOS) decisions influence compliance rules to the consumers ultimate detriment.
Now, I want to look at additional areas where the FOS thinking process affects both advisers and clients and which seems to be predicated on the assumption that cost, rather than value, is king.
- Optional child cover
A number of networks advise that they do not allow optional child cover to be added to a plan if the couple does not currently have children, as doing so would be termed ‘future insurance' and would entail a slightly higher monthly premium.
Therefore, an adviser that understands the common sense of having children's critical illness cover in place prior to birth is forced to use an insurer that automatically includes the cover or, even worse, opt for no child cover and hope that the client alerts them prior to the birth.
The majority of quality child critical illness coverage provides protection from birth and includes a range of congenital conditions, many of which are evident at birth, such a spina bifida and Down's Syndrome. Also, some insurers include child death benefit from 24 weeks gestation as well as pregnancy complications and, in the case of AIG, birth defect cover
All of this valuable insurance will be lost if children's cover is not in place prior to birth. Networks and compliance officers are concerned that the FOS will interpret the slight additional cost as unnecessary and find against them in the event of a complaint.
- Two single life plans Instead of a joint-life plan
It is undeniably true that two single life plans offer better value than a joint life first claim equivalent. They provide independence for each party, as well as offering the potential for a double payout.
If critical illness is included it enables the non-claimant to retain his or her valuable protection. Additionally, it enables a double payment in the event of a children's critical illness claim and also allows the adviser to select different insurers so that the plans can be tailored to the clients' specific needs.
Again, there is a small cost differential, typically £2.50 p/m and this additional cost is what networks fear if the FOS receives a complaint. Don't forget, when the FOS receives a complaint it doesn't restrict itself to the specific complaint levelled but, using its inquisitorial remit, looks at every aspect of the advice process and could find a completely different reason to uphold the complaint.
- Level term insurance to protect a decreasing mortgage
Many advisers prefer a level term plan as it provides additional increasing protection. The old chestnut that a widow never complains that her husband was over-insured springs to mind.
Naturally, a level term plan is dearer than a decreasing equivalent and my understanding is that the FOS does not like this route, preferring that the mortgage and the personal cover policies be kept separate. This is yet another instance of the FOS taking on the role of a regulator and expressing a view that surely falls outside of its responsibility.
- Selecting a life and critical illness plan for a single person when protecting a mortgage
As pointed out in a previous article, the vast majority of young, single people will form one or more relationships during the following 25/35 years. Therefore, including life insurance with critical illness is not only sensible, not only forward-thinking but in most instances no dearer than a stand-alone critical illness plan.
The FOS has implied that such a plan would fall foul of their thinking on the ingenuous basis that at the time of purchase the applicant had no financial dependents and therefore the life insurance element was not needed.
Value over price
As an industry we regularly point out that value for money generally trumps price. This applies as much in the pension/investment arena as it does protection. If every decision we make was purely cost-led we would all live in tents, cycle instead of drive (or maybe walk) and never enjoy the benefits of good food and drink.
The issue here is not necessarily that one option is better than the other, but that value is what most people look for. I suggest that a sensibly written suitability letter, explaining the discussion, the relative costs and the decision-making process should be sufficient for any adviser to feel confident that the FOS will not take a divergent view.
Alan Lakey is director of CIExpert