While advisers are often aware companies such as Barclays, Direct Line, Nationwide, Sainsbury’s and Santander may offer single-tied protection plans designed by the likes of AIG, Aviva or Legal & General, what they might not be aware of is that the quality of those plans can differ from those available through advisers with the same insurers.
I sometimes encounter consumers who explain to me they have a very good plan with Aviva or L&G, and I respond telling them the products offered direct-to-consumer (D2C) by insurers or aggregator sites are generally inferior versions of those marketed via advisers.
Professor Jim Gower, the architect of the original Financial Services Act, argued consumers should not be made fools of but should be allowed to make fools of themselves
Now, I am not saying there is anything wrong with this. Insurers are free to market whatever plans they wish D2C or via aggregators and, similarly, consumers are free to buy whatever they wish from whoever markets the product.
Back in 1986, Professor Jim Gower, the architect of the original Financial Services Act, argued consumers should not be made fools of but should be allowed to make fools of themselves, and this seems a perfectly sensible approach.
There is a logical stratagem that dictates the simpler the plan design, the fewer the options available, and the shorter the brochure, the less confused a consumer might be. And the more likely they might be to buy it.
However, plans designed to be offered via advisers tend to be more comprehensive and usually pay higher sums for additional payment conditions and children’s critical-illness cover.
As these consumers have not been advised, they have no recourse to the Financial Ombudsman Service if things go wrong
Where it gets interesting is when a consumer approaches an aggregator site looking for a critical-illness plan – something that seems inordinately popular, according to our Critical Thinking 24 survey published earlier this year.
A scrutiny of the Compare the Market site shows they offer plans by Nationwide and Sainsbury’s, as well as Aviva, Beagle Street, L&G, LV=, Vitality and Zurich. In every instance, those adviser-supporting insurers’ plans are their core plans, where the lower premiums invite comparison with D2C-only brands such as Virgin Money and Budget.
Bizarrely, when I checked, the Virgin and Budget brands show as dearer than the other plans.
MoneySuperMarket similarly offers insurers’ core plans and, like Compare the Market, always excludes total permanent disability and frequently omits children’s critical-illness cover.
Consumer Duty mandates all plans should undergo regular review and advisers should extend this to those where the consumer has, unwittingly, made a fool of themselves
Another area to watch out for is the choice of interest rate made by the insurer. The lower the plan’s interest rate, the more quickly the sum of insurance will reduce, regardless of whether it reflects their actual mortgage rate.
Of course, the lower the rate used, the cheaper the plan premium is. With Compare the Market, we can see 8% as the default rate with Zurich, which contrasts with 5% used by Vitality’s SIC1 plan. The other plans use a mix of 6% and 7%.
Consumers are likely to have no idea of the impact of these interest-rate assumptions and, as they have not been advised, they have no recourse to the Financial Ombudsman Service if things go wrong.
Advisers can learn from this because each year we see non-advised sales increasing, meaning there is a large body of consumers with plans that are of a low quality, without total and permanent disability, without children’s cover and almost certainly not written in trust.
The Consumer Duty mandates that all plans should undergo regular review and advisers should extend this to those plans where the consumer has, unwittingly, made a fool of themselves.
Alan Lakey is founder of CI Expert
An excellent article as usual, Alan. Is there any good reason why the regulator shouldn’t mandate a uniform assumed rate of interest for all mortgage-related protection plans?
No, that would make it too intrusive. What is the right rate? Average mortgage rates have varied from 9% in the 1980s to 7% in the 1990s to the current ghistorically low rates.
An interesting and worthy article – more please MM!
Given most natural persons really need an income – I wonder if/why FIB is (still) sold so little? Few need a million when their children are in final year of college, say, yet, the cost saving/increased or more varied benefits/indexation/tax efficiency, and lack of investment risk… seem rarely to be heard.
Sure, a lump dum is always useful as debts usually exceed a net of tax stable return, why not have both?
Informing people of a cheaper, more suitable, and, if pressed a lump (discounted) sum anyway, is sure to gain their attention – + you will be fishing in a near empty pool!!
Is anyone finding that insurers are finding creative ways to avoid paying protection benefits in relation to Covid or Long Covid claims? Creative in terms of not applying diagnosis dates of Covid / Long Covid properly or finding ways to make assessments on”Work Tasks” definitions rather than “Own Occupation” basis.
Good for you Alan.
What supermarket plans also don’t offer are trusts or life of another. Not a lot of good having live cover if when a claim arises the sum assured is paid to the one taking out the plan. The proceeds are then potentially liable for IHT after they come out of probate.
I well recall a client asking me what he would get if he dies. My reply was “Nothing” you will be dead, the insurance is for your beneficiaries and it’s not ‘if’ but when.