What types of life assurance are there and why should financial advisers sell it?
There are two main types of life assurance: whole of life assurance and term assurance. Whole of life, as its name implies, covers the policyholder for the whole of their life, whereas term assurance only provides cover for a specified period ‘ usually the life of a mortgage.
A 30-year-old non-smoking male has a one in seven chance of dying before he reaches 60, which is eight times more likely than winning £10 on the National Lottery ‘ a good reason to check your client has adequate life cover in place.
Selling life cover makes good sense. It is a valuable service to clients and can generate an additional income stream, with renewal commission payable annually. A life policy with a monthly premium of £7.95 would generate a commission of between £160 and £190, depending on the insurer, and commission is also payable on an indemnity or non-indemnity basis.
What changes have been taking place in the life assurance market?
The good news is that the cost of life cover has fallen dramatically during the past decade. According to Swiss Re, the average monthly cost of £100,000 policy for a 30-year-old male non-smoker with a 25-year policy has fallen from £14.20 in January 1994 to £7.95 in April 2001. Premiums for smokers have also fallen, by as much as 40% since 1994.
Why has the cost of cover fallen so dramatically?
Fewer people are claiming on life policies between the ages of 40 and 60 than life companies anticipated. In the mid-1980s, life assurance rates rose on the back of AIDS fears, but AIDS-related deaths in the UK are not as high as the original predictions. The Terrence Higgins Trust estimates that 35,000 people have AIDS in the UK ‘ compared to 1.5 million people who have diabetes.
Greater competition has also helped drive down costs, with supermarkets and the likes of Marks & Spencer selling low-cost policies through their high street stores.
What do these changes mean for clients?
Life cover has never been cheaper. Those who have not renewed their life cover for the past five years will almost certainly be able to make considerable savings. Clients who have never had life cover are in for a pleasant surprise as it is not as expensive as they may have thought.
Last year, Eagle Star Direct undertook research which found 25% of people without life cover thought it was too expensive. A typical person can put £100,000 of cover in place for less than £10 a month.
Do most people have basic life cover in place?
No. Research recently undertaken by Mintel shows that 42% of adults do not have (or do not know if they have) life assurance in place. For people under 25 ‘ the typical first-time buyer market ‘ the figure rises to 83%.
Unfortunately, figures from the Office for National Statistics confirm that people have every reason to arrange cover. Statistically, one in four adults will suffer a critical illness before the age of 65 and one in three people are at risk of cancer.
Don’t homebuyers have to buy life cover when they take out a mortgage?
Lenders used to insist on borrowers having life cover if they had a capital and interest repayment mortgage, and the life policies were often assigned by the lender. These days lenders do not insist on life cover and leave it up to advisers to ensure adequate cover is put in place.
Over the past decade we have seen a steady fall in the number of endowment polices being sold and 68% of all new mortgages are now sold as repayment loans. Only 13% are endowments and the rest are made up of interest-only loans supported by a personal equity plan (Pep) or pension policy.
The underperformance of endowment policies has also led to a number of borrowers cashing in their policies and converting their mortgages to repayment loans. This shift towards repayment mortgages has given rise to a sharp increase in the need for life cover.
Have borrowers been alerted to the problems of endowment policies and taken remedial action?
Regrettably, no. Many life companies will be sending out a second round of letters notifying policyholders about the shortfalls they may encounter. This will encourage some homeowners to consider converting at least part of their mortgage to a repayment loan, which means they will need to put life cover in place.
Are premiums likely to fall further?
No. Most insurers have adjusted their premiums to take into account improvements in mortality and morbidity. Rates are as low as they are likely to go, but it is worth comparing costs between insurers as premiums do vary.
However, anyone who has recently had a serious medical condition diagnosed may be better off staying with their existing insurer.
David Quick is managing director of CETA