Life InsuranceMar 4 2015

AE cover would be a life-saver

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Forty is the new 30; 50 is the new 40; 60 is the new… well, you get the idea. We are all – inevitably – getting older, living longer and healthier lives and enjoying much more rich and varied retirements than generations past.

Fixed retirement ages, though still marked by the date at which men and women can draw their state pension, are being discarded or ignored in favour of working well into later life, becoming a “pentrepreneur”, maintaining a portfolio career or taking ‘gap’ years for those pensioners with the money to travel the world.

And this trend is set to continue. More than 22 million of the UK population are now over 50. Indeed, for the first time in recorded history, the UK’s over-65s outnumber those under the age of 16. And many more of us are making it well into our 80s – pensioners currently aged 75 can expect to live another 13 years if they are female, and nearly 12 more years if they are male.

The upshot of this is that many of the products designed for generations past are no longer relevant, and new solutions and approaches are needed to meet the requirements of our changing demographics. Life insurance – and the wider protection market – is no exception to this rule.

As most advisers will be aware, probably the most common and affordable form of life insurance is term assurance. Term cover pays out a cash sum if the customer dies during the length of the policy. For an over-50, term cover is essential in terms of ensuring any mortgage debt can be covered in the event of a sudden loss, as well as to help protect the surviving family’s lifestyle and cost of living expenses. Term assurance premiums will not go up, unless the customer alters the policy, so there is certainty for the insured in terms of monthly outgoings. Many term policies include additional benefits, such as terminal illness cover and accidental death benefit which pay out a lump sum on diagnosis of a terminal illness or if the customer dies in an accident.

The graph here illustrates how the cost of term life assurance increases with age, based on a customer at different ages taking cover until age 75.

Many over-50s will have some kind of term assurance if they own or have owned a property. So if that is the case, the next area to look at it would be critical illness cover. Critical illness cover is designed to pay out the customer’s chosen amount of cover if they are diagnosed with a specified critical illness covered by the policy during the length of their policy.

An alternative option to term assurance is a whole of life plan – a life assurance contract designed to give the customer a specified amount of cover for the whole of their life, which pays out a lump sum on death. When the customer dies, this money can be used to help pay the estate’s Inheritance Tax. If there is no IHT, the customer’s beneficiaries could spend or save the money as they choose.

Both term assurance and whole of life plans involve medical underwriting, but for over-50s, who are statistically more likely than younger people to have health issues, this can translate into higher premiums. That is where specific over-50s plans come into their own. These plans pay out a cash sum if the customer dies after one year of taking out the plan. Premiums are fixed (they can be as low as £8 a month) and there is no lifestyle or medical underwriting. However, advisers do need to make customers aware that over-50s plans may result in the total premiums paid being greater than the cash sum payable on death, depending on how long the customer lives.

There are certainly some options available in the protection market for those of working age who are 50-plus. But the challenge, as ever, is raising awareness of the need for protection. There are many more ostriches among us than eager beavers when it comes to getting our protection insurance in order (understandably, given few of us spend any more time contemplating death and critical illness than we have to). The problem is, this reluctance to address the issue means that many UK families are underinsured in protection terms, and therefore at risk of financial hardship if a death or critical illness strikes.

So what can be done to address this problem? I believe the answer may lie in the success of the UK’s pension auto-enrolment programme, which aims to ensure all workers – older and younger – have a private pension pot to draw on when they retire. The key to the success of pension AE is turning an issue that most average workers find incredibly boring and irrelevant into something positive that they do not even have to think about. The employee pays in, their employer contributes, and the load is shared. As a result, those who have begun saving at an early stage in their career can now look forward to a more enjoyable retirement.

Imagine if we could do the same for protection. Working in partnership with the government and employers, it would be perfectly feasible to ‘auto-enrol’ individuals – including older workers – into a scheme where they contributed a few pounds a month towards protecting themselves financially in case the time came when they could not work.

Legal & General estimates that by using half of the savings generated from the recent pension tax reforms, projected to be £8bn, along with a tranche of the savings from other benefits reform, the government could cut National Insurance contributions by around £6.5bn and still be on target to fund its planned tax cuts. Increasing protection levels among older workers, as well as those who have already retired, would have a significant impact in terms of reducing the pressure on the state if an unforeseen incident should affect a family, as well as mitigating some of the risks associated with the debts many of us are now carrying into our retirement years.

There’s a key role for advisers to play here, of course. Older clients with more complicated circumstances do need that little bit more support from advisers and providers alike.

Ian Barnes is head of product marketing at Legal & General Insurance

Key points

Fixed retirement ages are being discarded or ignored in favour of working well into later life.

The most common and affordable form of life insurance is term assurance.

An alternative option to term assurance is a whole of life plan.