10.1 - Advising Individuals on Protection Flashcards
For which aspects of insurance is “attitude to risk” most important?
Primarily attitude to risk is relevant to any contract with an investment element, where obviously attitude to risk determines the type of investment that should be made.
To a lesser extent it affects policies with reviewable premiums. Should the client lock in a guaranteed long term premium (which might cost more) or accept the risk that premiums get bumped up later on.
Generally it’s not a big focus for most protection policies.
Five steps of the life assurance planning process
- Identify the need for life assurance
- Quantify the amount of capital and income requried if the person were to die
- Determine the time period over which the cover is required
- Take into account any other policies, state benefits or assets that reduce the amount of extra capital and income required
- Determine the appropriate type of policy
Life Cover Levels
How much lump sum do you need for a certain level of income for X years?
There is an income multiple basis for this calculation. Obviously multiplying the annual income by the number of years will be sufficient.
For periods of 15 years or more you can use slightly lower amounts (14.5x for 15 years, 18.5x for 20 years, 22.5 for 25 years) to account for returns earned on that lump sum.
What is the risk to taking out too much insurance cover?
Policies which pay income typically have benefit caps in place based on a percentage of earnings. If you are paying for a higher level of cover than the cap you won’t get the benefit anyway so it is wasted.
IP or CIC?
Potentially the client might want to have both.
IP is less specific about the conditions, it covers anything that prevents you from working. But it stops paying once you are able to work, even if you no longer want to. The insurer can also be tricky about when they pay out.
Critical illness is more straightforward in terms of payout, if you get a specified illness you get the cash lump sum. However it only covers specfic problems and if you’re off work for a different reason it’s no help. The lump sum might not be suitable if you’re off work for a long period and have high expenses for a long time.
What if the clients employer provides some insurance (eg PMI, life cover, IP)?
There is a risk that the employer withdraws the cover, or the client loses it if they change their job.
However you still include this in your calculations (eg if they need £1m of life cover and get £500k from their employer, they only need to buy £500k themselves).
But you need to make the client aware of the potential gap if the employers cover disappears.
Redundancy
Why might clients underestimate this risk?
Concerns around insurance cover
Alternative arrangements
Clients often assume the state will protect them, however unemployment benefits are highly restricted and means tested. Mortgage benefit has a lot of restrictions (£200k, 39 weeks, interest only).
Insurance cover can be difficult as insurers have lots of excuses not to pay out, especially for the self employed.
Alternative protection is to build up emergency funds, use MPPI, take out a flexible mortgage where payments can be suspended for a while and be prepared to reduce expenses for a period if the worst happens.
Impact of underwriting requirements on your product selection
Although cost and benefits of the policy are the main considerations, the underwriting process of providers should be considered.
Clients may not want to have a GP appointment or go for tests (maybe they’re concerned something would be uncovered that increases the cost).
So the underwriting requirements of various providers may be a factor in your advice.
Why is financial strength of the provider relevant?
They can only pay out if they haven’t gone bust!
You should look at things like free asset ratio to determine the risk of them not being able to pay out.
A foreign firm might be more willing to let a UK subsidiary go bust than a big local UK firm.
