Financial protection, as financial advisers well know, is one of the building blocks of effective financial planning. It provides a financial buttress against some of the unforeseen events that life can throw a family’s way – be it serious illness, an accident, or even death.
Sadly, it is a financial necessity that has never really caught on for a number of reasons. You can blame the bad smell left by the widespread mis-selling of payment protection insurance, which has ensured all forms of protection insurance – bad and good – now get routinely stigmatised.
So, whenever I write an article on the merits – and drawbacks – of protection insurance for the Mail on Sunday, most of the online comments are either vitriolic or incorrect.
“Advertising thinly disguised as editorial,” is one common remark.
Another goes along the lines of: “Buyer beware – they are useless unless you are out of work for more than 12 months. And the payments are limited to three months only. These insurances are largely a scam.”
This sentiment is expressed whenever we write about income replacement insurance. A comment based on the erroneous view that all financial protection insurance is moulded along the same lines as payment protection insurance – short-term cover that more times than not is unfit for purpose.
It is also a financial solution that is not sexy for people to buy and for advisers to sell. Homeowners are more interested in building long-term wealth than paying a premium for something they may never need to claim on. Similarly, most financial advisers are far happier wealth building for clients than recommending them to buy a critical illness plan, a family income benefit policy or income protection.
The result is an alarming protection insurance black hole – and one that is not going away.
The latest statistics from Swiss Re say it all. Last year, just short of 1.7m individual financial protection policies were sold in this country – an increase of 0.9 per cent on the year before. Encouragingly, sales of income protection policies were up by 10.7 per cent to just above 107,000, although Swiss Re is keen to put this into some form of context by stating that the UK has the largest ‘disability protection gap’ across all major European countries of £200bn a year.
The summary comments made by the authors of the Swiss Re report (Maxine Udall and the hugely respected Ron Wheatcroft) are damning. “Whilst the need for appropriate financial protection has never been greater, the market is currently in a phase of decline and losing consumer, government, third sector, media and financial adviser trust.”
There is more: “Protection is moving to the edge of the adviser radar as they focus on large corporate auto-enrolment and – post RDR – wealthy client pension provision, at retirement freedoms, investments and buy-to-let.”
Hardly a great endorsement of the protection insurance industry. So, what can be done to transform the health of the industry or do we just accept that financial protection will always remain under the radar?