The UK protection gap has been a major talking point in recent years and an area where financial advisers have been encouraged to do more.
Every couple of months a new study is released documenting the lack of people protected in the UK, with Scottish Widows being one of the latest providers to reveal the scale of the problem.
According to its recent study of 5,221 adults, based on research carried out by YouGov, half of UK homeowners have no life insurance policy in place, while just 17 per cent are covered by critical illness and 7 per cent by an income protection policy.
As many familiar with the sector will be aware, this was not the first study to reveal such a deficit and functioned more as a confirmation of what has become a growing problem in the UK.
With so many of the population underprotected and the issue seemingly not going away, advisers have started to feel the heat of this frustration and have been called on to stop neglecting what many see as a pivotal tool in financial planning.
According to Neil Sadler, Chartered financial planner at Lift-Financial, the widely-publicised negligence of protection by some financial advisers can be linked to a number of factors.
He claimed the majority of advisers deal with older clients who have fewer protection needs, before adding that many firms specialise in investments and see protection cases as “hard work” in terms of application processes and underwriting.
But despite these reservations and obvious hurdles for some in the profession, Mr Sadler, who has many younger clients, said protection was one of the first things he discusses.
During his initial training he was taught that emergency funds and protection should be dealt with before other areas, and has applied this approach since day one.
“Protection is relevant to any client with a shortfall,” he says. “Where there is a gap, I would bring it up early in the relationship as a priority to cover off. The sooner the matter is dealt with the lower the premiums.
“Most of my clients have young families and therefore adequate life cover in trust is always a key issue. We also look at second death whole of life cover in trust as one of several options to deal with inheritance tax planning.”
Back to the basics
Likewise, Paul Gibson, Chartered financial planner for Carbon Financial Partners, was keen to emphasise the importance of protection insurance. Referring to protection as the “bedrock” of any financial plan, he criticised his peers who ignored it as causing a “disservice” to client needs.
“Protection planning should be a bedrock of any financial plan,” he says.
“As financial planners our job is to try and ensure a client never runs out of money, whatever happens. We need to consider the implications of death or disability and the effect on the client’s financial plan and advise them accordingly.
“It would be fair to say that many financial planner client banks will contain many more mature clients, who have perhaps paid off their mortgage and whose family are now financially independent. The need for protection for these clients will naturally be lower.
“For younger accumulator clients, however, financial protection will be absolutely vital and to ignore this would be a serious disservice to those clients.”
Many financial advisers advertise their services as ‘holistic’, meaning they plan to take into account every potential client need.
While protection may not be as glamorous or exciting as investments or pensions, for many it still serves a fundamental purpose in protecting ones assets.
The bigger picture
According to Karthica Underwood, Chartered financial planner at Principal Financial Planning, any financial planner who overlooks gaps in a client’s finances is not doing the job properly.
One of the first things to do when meeting a client, she said, is to explore how well protected they are and to make them aware of any holes that might exist.
Although many clients do not go to advisers seeking protection advice, she explained that it was important to always make them “aware of the bigger picture”.
As protection serves a purpose across many areas, in most cases she said clients would require some form of cover.
“Clients have different protection needs. For example, those with a mortgage would ideally want to have something in place to ensure that this is paid off on death or being seriously ill.
“Income protection can often be a big concern for those who may be in the early stages of building their assets and rely heavily on their income.
“Protection also covers areas such as inheritance tax (IHT) planning, whereby policies are taken out to cover the IHT payable and also ensuring that, if appropriate, policies taken out to provide for loved ones are put into trust.
“In an ideal world clients would have in place all the protection they need, however this has to be balanced against affordability and the key is then to distinguish between what is important and what is nice to have.”
For Robin Keyte, director of Keyte Chartered Financial Planners, when first considering the financial planning goals of a client it is essential to contemplate what events might “threaten” them, like loss of family income due to death or ill health.
The most important products, he says, are life cover and income protection, whereas he defined critical illness as a “luxury” that is “less essential”.
In terms of his approach, he says: “For life cover typically I would use joint life first death term assurance to cover debt repayment in the event of a death, family income benefit to pay for the costs of raising children in the event of a death, joint life second death term assurance through to age 75 as a cheap form of IHT protection that buys time for clients to make suitable IHT planning arrangements prior to age 75, and gift inter vivos cover for potentially exempt transfers.
“In all cases, I would seek to place the policy under trust to avoid unnecessarily inflating the client’s estate for IHT purposes. For ill health I would use income protection with a deferred period consistent with sick pay under a client’s contract of employment – if employed – and cash savings, etc. I would also talk about private medical insurance to help reduce treatment times.”
