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Brokers warn of ‘false economy’ of protection policy cancellation ‒ analysis

  • 19/04/2022
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Brokers warn of ‘false economy’ of protection policy cancellation ‒ analysis
Advisers should emphasise to their clients that closing their protection policies in order to boost their finances currently is a ‘false economy’, brokers have argued.

Last week the Association of Mortgage Intermediaries (AMI) published an updated guide for advisers on selling protection policies, with the aim of saving them from being cancelled as a result of the increasing cost of living.

This was accompanied by a new consumer guide advisers can share with their clients, which Stacy Reeve, senior policy adviser at AMI, said would help advisers to “engage with their clients and prompt discussion about their cover”.

Brokers told Mortgage Solutions that the current economic situation does increase the chances of some clients looking to scrap their cover, but argued that if anything, protection policies should be even more highly valued currently.

Cover has never been more important

Rob Peters, principal at Simple Fast Mortgages, said that as “the noose around people’s finances tightens” it was likely that some would look at insurance policies as less important, and therefore an area where they can cut back or cancel policies.

However, he argued that actually having the right cover in place is now more important than ever. 

“For instance, clients unable to work due to illness or injury will have an increased reliance on income protection to subsidise lost earnings in the event of a claim. What in the past might have been a ‘nice to have’, may now be crucial in meeting the normal costs of living. Advisers need to ensure they are having regular reviews with clients to ensure insurance policies remain affordable and important cover remains in place.”

Sell protection properly from the beginning

The only way to ‘save’ protection policies is to ensure they are sold and advised on in the right way from the outset, according to Lewis Shaw, founder of Shaw Financial Services.

He added: “We know that if things get tight, some people ‒ typically the less financially aware, it’s sad to say ‒ may look to reduce costs and cancel their life insurance rather than getting rid of their TV package or reducing their takeaways and meals out. 

“The only thing to be done in that scenario is to contact the clients and explain the importance of insurance.” 

A false economy

Scott Taylor Barr, financial adviser at Carl Summers Financial Services, said that across the country there is something of a collective view around insurance that it should generally be avoided, and that cheapest is best, meaning it is often the first to be sacrificed if times get a little tough, which he warned is “so, so wrong in terms of priorities”.

He continued: “Even if they take the decision to cancel the cover they have for a short while, if they don’t fall seriously ill or die in the meantime, when they come to reinstate the protection, they will need to take out a new policy. 

“However, they will be older and may have health complications then that they didn’t have when they originally took out cover, meaning the replacement is likely to be more costly than the original, making the ‘savings’ of cancelling the payment for a few months a false economy.”

Brokers need to change attitude towards protection

Samantha Bickford, mortgage and equity release specialist at Clarity Wealth Management, said that the onus was on brokers to contact clients to get an idea of how the current crisis is affecting them and whether those clients can afford their premiums.

She added: “The industry needs to change from viewing a protection policy as a one-off transaction to a lifelong client who has an annual review to ensure the policy still meets their ever-changing needs, and budget.  

“This could be the difference between making some tweaks to a protection policy to ensure it remains affordable with the vital protection still in place, and the client cancelling completely, leaving them and their family unprotected. 

Bickford argued that clients should view the importance of their protection policies as on par with making the mortgage repayment, and suggested this was available through better education of clients.

Do clients understand the risk they are taking?

Shaw added that it’s crucial for clients to understand the consequences of ditching their protection policies. 

He said: “I have no problem if someone cancels their life plan; however, I explain that they are making a positive choice to put their family at risk. If something sadly does go wrong, and hopefully it doesn’t, you’ve given up your right to complain about it. I have seen in my time the consequences of people cancelling life insurance and it is absolutely devastating for the people left to pick up the pieces.”

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