There are two distinct types of protection cover available: one is designed to pay a lump sum in the event of a claim; the other is designed to pay an income. Lump sum products generally pay out in the event of death, terminal illness or a specified critical illness. The main income products are designed to pay out in the event of loss of income due to illness, injury or unemployment. There are also some rarely used products which do pay an income in the event of death or critical illness.
Just the one lump?
Term life insurance is the most commonly bought type of cover: it provides a lump sum in the event of death during the plan term. It can be arranged on a level, decreasing (to cover a repayment mortgage) or increasing (indexed) basis. Critical illness term insurance is the second most commonly bought type of cover. It pays a lump sum on diagnosis of any one of a wide range of specified illnesses.
Most advisers now recommend policies which include life cover, even if the life cover is not obviously relevant to the client. This is because it often makes the policy cheaper and it means that the critical illness condition does not have to persist for a minimum period of time, typically 14-28 days before death, for a claim to be accepted. Critical illness cover is also available in a level, decreasing or increasing basis.
Whole-of-life assurance pays out in the event of death, though some providers also offer critical illness cover on a whole-of-life basis. As the name suggests, the policy is not restricted to a specific term. These types of policy often included some form of investment element in the past. Nowadays they are widely available as pure protection.
For all the lump sum products above, once a claim is met the policy ceases.
Incoming
Mortgage payment protection insurance (MPPI), also known as accident, sickness and unemployment insurance, pays out if the insured person is unable to work due to an accident, sickness or unemployment. It is designed to insure part of the insured person’s income, within the provider’s limits, and claims are also limited to 12 or 24 months. A number of important exclusions apply to these policies.
Income protection (IP) products are designed to provide part of an insured person’s income – again limits apply – in the event of illness or an injury that prevents the insured person from working. Policies are arranged for a specific term, often until the insured person’s retirement age.
Claim payments are limited to when the insured person is able to return to work or the end of the policy term, whichever is sooner. Some insurers also include limited unemployment cover. With MPPI and IP, the policies can continue after a claim as the policy may be needed again in the future.
Family income benefit (FIB) is rarely bought and often commuted to a lump sum on claim. FIB provides a monthly income in the event of the insured’s death, or critical illness if included. The income is paid from the time of the claim to the end of the plan term. With FIB, once a claim is met and payments commence the policy ceases.
Understanding your customer
Financial protection is all about protecting what you have for yourself, or for your dependants. Different customers will want to protect different things; some might focus on the basics, while others may want to protect a particular lifestyle. You will need to understand what is most important to your individual clients so you can match the cover to their needs
It is always key to understand the cover a particular client may already have in place, including policies which they may have already bought. Many people think that if they fall ill, have an accident or are unable to work, the state will provide, however benefits are quite limited. Employed customers may already have some cover provided by their employer which will have to be taken into account when you advise.
There is no ‘one-size-fits-all’ solution. Everyone is different and has different needs when it comes to choosing the right product or products. Which products are most appropriate for your customer will depend on how much cover they need, their age, lifestyle, family status, how much they can afford, and also what they consider most important in life.
The most important thing for any adviser is to ensure that the advice they give starts with the customer in mind and not the products. If you want happy, confident clients who keep their policies then you need to tailor your advice and provide solutions, not simply products. Remember: advisers advise, clients decide – and pay the premiums – so they have to truly value the cover you arrange if you want them to keep it. n
