Hi everyone, hope you’ve had a good week.
I had an email from Nick Meek from Vida Insurance this week (who many of you will know as an adviser within the network) and he had an interesting sales angle he wanted me to talk about in this week’s protection update; so that’s what I’m going to do… If you’re reading my transcript, just bear in mind I’m going to use some visual examples on the actual podcast which will help bring what I’m about to talk to, to life.
Nick mentioned that there have been several articles published recently regarding the vulnerability of protection policies in this current cost of living crisis.
For example I mentioned this subject a couple of weeks ago when I talked about how we could ‘save protection policies’ and Nick pointed me to an article which you can read in cover magazine called – How protection-writing intermediaries can navigate the cost-of-living crisis (covermagazine.co.uk).
I’ve added a link to this week’s protection update.
Nick posed the question, that with inflation reaching heights not seen in decades, should it be sound advice to discuss the benefits of increasing cover to all of prospective clients?
I’ve recorded this protection update on Thursday 26th May and the rate for retail price index is actually 8.2%.
Is that going to be a problem for clients who have indexation on their policies where the indexation rate is RPI?
Nick pointed out that after doing a bit of research, he discovered that not all providers offer the same terms and conditions for how their indexation cover works.
I’ve written to Protection Guru this afternoon to see if they can do one of their excellent pieces of research on the market as there is a lot of detail here that advisers don’t ordinarily get to know, but it could be fundamental to your advice and recommendation.
Indexation – the differences across the market
When a client chooses indexation, we know that the sum assured will go up in line with that level of indexation selected.
For example, if the client chooses 3%; then the sum assured will increase by that amount of 3%.
The premium will also increase, but it will increase by a higher premium factor than just that indexation amount. And this is one of the things which is different across the market.
Most providers use a premium factor of 1.5 times.
What that means is that when the increase is applied by the indexation amount, the premium will increase by the indexation amount and then by the premium increase factor.
So, here’s a working example…
A premium of £40 for a policy with a sum assured of £100,000.
The indexation amount of 3%.
On the next policy anniversary, the sum assured will increase by 3%. That takes it to £103,000.
The premium of £40 needs to increase by the indexation amount but also the factor. Let’s say the factor is 1.5.
So, 3% of £40 is £1.20
Then multiply £1.20 by the premium increase factor which is 1.5. That’s £1.80 so the new premium will be £41.80 for the new level of cover.
You might think that doesn’t look too bad, but what’s the effect going to be when the indexation rate is a lot higher – for example RPI which is currently 8.2%?
Sales Calculator
I actually built a generic calculator which allowed you to forecast the effect that indexation would have on both the premiums in the future as well as the sum assured.
And you need to be mindful that different life companies have different premium increase factors which will make a big difference when you look at the numbers.
Let me give you an example.
I’m doing some research and I’ve found a couple of products with Royal London and Legal & General.
I’m using those 2 life companies purely for illustrative purposes and because they use different premium increase factors.
Let’s say I’ve found a product with Royal London which has a premium of £53 per month. The Legal and General policy is £49.50 per month. They both offer the same level of cover on the sum assured but I want to include indexation. In this example I’m going to choose 5%.
I want to know what the longer term affect might be with indexation cover on both policies. Clearly there is a cost saving with the Legal and General policy.
Using my calculator, I’ll enter the details for both Royal London and Legal & General.
The sum assured is £100,000 for both policies.
The indexation rate is the same for both policies – 5%
But the premium increase factor is different. It’s 1.2 for Royal London and it’s 1.5 for Legal and General.
(it is possible to find out those factors for every life company but it’s not always that easy. It’s not always shown on the quotation so you might have to do a bit more digging which is why I’ve asked Protection Guru to do a research piece on this subject)
So, what can we see…
What we can see s that the premium with Royal London is more expensive for the first 6 years than the Legal & General policy.
The sum assured is identical on both policies because they have both started from the same point and increased at the same level each year.
But you can see here that in year 7, the premium becomes more expensive with the Legal & General policy. That’s because the premium is increasing at a higher rate than the Royal London policy.
Now let’s just say this is a 25-year term… we can see that by the end of the policy term; the premiums are significantly more expensive with the L&G policy.
Now this is just an example and I don’t mean to pick on Legal & General. Most of the market set up their premium increase factors at 1.5. That is quite standard across the market.
The impact of high inflation on future premiums?
But I think a significant consideration right now is those RPI policies.
How much are those premiums going to go up by on their policy anniversary?
Well, you might want to flush this through my calculator…
If a premium is £50 this year and let’s just say that RPI is 8.2% at the policy anniversary; that’s going to result in the premium increasing to £56.15 (an increase of £6.15 per month) if the premium increase factor is 1.5.
If the premium increase factor is 1.2 the premium goes up to £54.92.
But either way, it’s good to be aware of this so you and help manage your clients’ expectations.
Nick also drew my attention to the rules regarding situations where the client can’t take or afford the premium increase.
Some providers withdraw the indexation option immediately which means it’s taken off the policy and you can’t use it for the rest of the policy term.
Other providers will allow you to waive the opportunity of increasing the policy without actually removing the option completely. You get ‘2 or 3 strikes and you’re out’ type situations which means you can’t keep declining the increases. If you do keep declining the opportunity to increase the policy; almost all the providers do take the option away.
Let me know what you think about indexation.
Do you recommend it? Do you talk about it?
And how are you going to manage these conversations at a time where we are seeing the highest inflation in 40 years?
Do you think RPI indexation is a good idea?
And just one more thing to point out; Vitality do have a different system for indexation and it’s worth bearing in mind because they do have a particularly attractive setup right now with regards to adding indexation onto policies. It works particularly well when inflation is at a higher level.
They also have some decent flexibility with how the indexation is used because the policy holder can have indexation on their policy and decline the actual increase any number of times throughout the policy term, as long as they don’t decline three years in a row
And the other quirky thing you’ll see is that Vitality actually charge lower premiums for index linked polices compared to level policies and they have a slightly different approach to those premium factors I’ve been talking about.
So, I think it’s another thing of consideration and it’s another thing where you can demonstrate your expertise with your clients.
It might be worth considering those clients who already have indexation on their policies and the rate of indexation that customers are selecting with new policies.
I’ve attached the calculator to this week’s protection update and I’ll also add this as one of the protection tools on the adviser site.
Protection Roadshows June
You should have seen the emails about our roadshows that take place in June in about 1 months’ time from now.
They are dedicated to protection and general insurance and the theme of these roadshows are ‘things you need to know about’…
We’ve given the providers a brief to work to and we want them to give you the context and detail of things you need to know about when giving advice and recommendation.
These are all about raising the bar and sales excellence.
Lots of you have registered which is great and there is a cut off number for each roadshow so please register if you haven’t already, but want to attend.
Bob and I will see you there!
And one more thing… don’t forget about the protection forums. This is where you can ask questions and open a dialogue with other advisers across the network. Some of you have started to engage with the protection forums which is great, but I’m sure many of you don’t even know what I’m talking about.
All you need to do is go to the adviser site.
Click on PROTECTION
Then click on the big FORUMS button.
As an example, Chris Pownall from Regency asked a question about a medical underwriting disclosure and we’ve got some responses from different providers which is very useful to know now and in the future.
I will check in on the forums and I’ll help where I can, but please remember that we have a protection forum (as well as one for all the other product areas) and remember to use them. If you find something out which you think would benefit other advisers, post it. If you need to know something, post it.
So that’s it from me for another week. I’ve got a couple of days off next week and of course it’s the Queens Jubilee.
That means my protection update will publish early, on Wednesday and I’ve got a special guest speaker for the protection update in my absence.
It should be good so please watch out…
So have a great weekend and shorter bank holiday week next week.
I’ll see you soon!
