When assessing the protection needs of a client it is unlikely that just one plan will meet all of their needs. For all but the smallest minority of clients, protecting their income in the event of ill health will be the most imminent need, however if you look at protection sales, income protection still lags behind life and critical illness cover. Statistically a client is more likely to suffer from an illness that will keep them off work for a period of time compared to suffering a critical illness or dying. The ability to highlight this to a client along with evidence that putting together a package of benefits within a menu plan can be done at a cost they can afford has not always been easy. Royal London’s new “Value of Menu” tool looks to provide such evidence and in this article we analyse exactly what the tool offers.

What is the tool designed to do?

At its core the “Value of Menu” tool is designed to provide advisers with additional collateral in order to help highlight the range of risks that could be covered within a menu plan, indicative costs based on different options and the chances of a client claiming.

This can then be used with clients in order to show that protecting against ill health does not need to be as expensive as it might seem and that by taking out a range of benefits they are more likely to be able to claim.

How does it do it?

The tool itself is very simple with minimal information required in order to generate the final output. It starts by capturing some basic details about the client(s) in terms of whether there are two clients being protected, if they have children and whether they have a mortgage.

Although not exhaustive these are all important points when considering multiple benefits as, depending on the responses, different benefits may be applicable.

Once these basic details are entered the next screen will look to capture a little more detail about each client. This includes the date(s) of birth, gender, smoker status and income.

After completing the basic details about the lives being covered, the tool will carry out some basic calculations in order to provide the costs and likelihood of claim of what is seen as the traditional approach compared to a multi-benefit approach.

What do the outputs provide?

When calculating the traditional approach, the tool presents a life or earlier critical illness plan for which the sum assured is based on three times the first lives income. If the client has children this will include standard children’s cover, if there are two lives input this will be joint life and if there is a mortgage the plan will be decreasing (if no mortgage it will be level).

As a comparison to this, the tool will also present a low cost menu approach. This will include life cover on the same basis, however if there are two lives this will be set up as two separate plans which increases the amount of cover provided. For each life, critical illness will again be single life with the sum assured equal to their income and standard child cover included in each policy. Also included will be income protection for each life on a 2 year benefit period, 13 week deferred period with the annual benefit equal to 30% of their income.

Inevitably as more benefits are included the likelihood of claim, which is calculated using the Institute and Faculty of Actuaries’ Continuous Mortality Investigation insurers lives incidence rates, increases. In the example we have run through the system this actually results in a 73% likelihood of claim compared to a 30% likelihood of claim based on the traditional approach.

In addition to the traditional vs menu results, Royal London also highlight a wider range of options which will provide increasing comprehensiveness of cover at higher costs.

• Essential Plus will provide the same level of life and critical illness cover for each life but increases the Income Protection annual benefit to the maximum that Royal London can offer based on income.
• The Comprehensive option however will enhance the children’s critical illness cover and provide the income protection on a full term benefit and the maximum benefit available.

Again these are great examples of the flexibility that menu plans can provide and how plans can be tailored to a clients need and budget. This will provide excellent discussion points for advisers in highlighting the options available to clients.

What are the limitations?

As a first iteration of the tool, Royal London have tried to keep the inputs and outputs as simple as possible, however this has resulted in limitations that advisers should be aware of.

Firstly as the assumptions for the sums assured are based on income, they are unlikely to representative of the actual mortgage amount and as such we would like to see Royal London capture this to provide more specific mortgage cover.

Royal London are also providing an assumption that the client retires at their standard retirement age and the tool may benefit from the ability to input a specific age and the actual term of the mortgage.

As the income protection cover is always based on a 13 week deferred period this will not be representative of the sick pay arrangements of many clients.

Lastly, we believe that family income benefit is one of the best ways to provide cover for the family in the event of death or critical illness but the tool does not currently incorporate this into the outputs.

Overall

As a conversation starter, we think this tool is ideal to support discussions around wider protection needs and the risks that the client face. For advisers that fall into the bracket of focusing on life and critical illness this is an excellent addition to the toolkit to support having those wider conversations. Whilst I would like to see the ability to tailor the outputs a little more to a client’s specific situation, just the ability to highlight the likelihood of claim is a powerful tool in any adviser’s hands. Hopefully future developments to the tool will include such functionality, however in the interim this tool should support the narrative that for the vast majority of clients covering a range of protection needs does not need to be as expensive as it first appears.