Why protection matters for intergenerational wealth advice

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Why protection matters for intergenerational wealth advice

Much has been made of the trillions in inheritance that is due to be transferred between generations in the next decade.

Since the introduction of the Retail Distribution Review, a lot of this wealth has been invested in pensions and Isas, often via the likes of discretionary portfolios. 

However, Rose St Louis, protection director at Scottish Widows, says that this asset gathering has not been matched with effective protection policies, leaving investors potentially vulnerable, especially if they intend to leave an inheritance for their descendants.

FTAdviser In Focus spoke to St Louis to hear her thoughts on how advisers should broach these conversations, and ensure clients' portfolios are future-proofed.

FTAdviser: How has awareness around protection policies in the context of intergenerational planning changed over the past five years?

Rose St Louis: Intergenerational planning is terminology typically associated with wealth and investments. However, increasingly as an industry we are beginning to question what this movement means for protection. 

Holistic financial planning is made up of asset creation and asset preservation. Given that the biggest and most important asset any individual has is themselves and their ability to generate an income, asset preservation is crucial.

FTA: Do the generations who will be inheriting wealth over the next ten years have a different attitude towards protection policies?

RSL: There has been much discussion over the years regarding the need to create a savings culture which many of our parents and grandparents used to have. I believe the same is true for protection.

There needs to be education and understanding in both areas so simply inheriting wealth will not create those behaviours. 

As an industry we need to do a better job of educating not just inheriting generations but all consumers about the value of protection.

Advisers have a duty of care to their customers so if they are tabling a conversation about investing, they should do the same for protection. 

There has been an increase in the number of people going to the web to search and buy protection highlighted in the growth of the direct-to-consumer market, so we know there is demand.  

Many employers offer a suite of flexible benefits including protection, and I would encourage them to use creative ways to present these products to their employees, given they are in a strong position where they have the most information on their colleagues and will know and individuals move through life stages that will require protection. 

FTA: What are the risks faced if a client doesn't have effective protection policies in place?

RSL: In the event of critical illness or long-term sickness, the client could find themselves exhausting their emergency funds and dipping into savings. 

In the event of death, if there is no life cover in place there could be a big challenge for the surviving spouse or family members as they may find it hard to be financially resilient when it comes to paying a mortgage, loans or car finance, as well as maintaining a general standard of living.

Research suggests clients are more aware of their physical and mental health and want to build resilience.

In the case of intergenerational planning, if upon death there is no life cover including the inheritance tax bill, the family may have to apply for a bridging loan to pay the tax. These loans routinely come with higher interest rates.

FTA: What are the main barriers around discussing and implementing protection policies, and how can advisers overcome these?

RSL: The run to asset gathering and ‘wealth management’ post-RDR has arguably left many clients in a position where they are creating a nest egg through their Isas, pensions, GIAs and discretionary portfolios but unprotected from a health perspective and therefore potentially vulnerable. 

I receive feedback from some advisers saying their client doesn’t need protection as they have so much money that they can effectively self-insure.

My question back to them is whether the client fully understands the implications of self insuring?

Advisers have a duty of care to their customers so if they are tabling a conversation about investing, they should do the same for protection.  

If an adviser doesn't have the experience to discuss or recommend protection, then they should refer the client either to an adviser in the firm who does, or create a partnership with a firm who can provide this advice.

Clients' needs are relatively easy to identify once you’ve totalled up a client’s estate and calculated the inheritance tax figure.

However, this is more challenging for some advisers who don't table a conversation that starts to explore what will happen to you and your family should you become seriously ill or die. 

As we emerge from the pandemic, research suggests clients are more aware of their physical and mental health and want to build resilience in this area. They would probably welcome a conversation around protection.

FTA: What protection policies would you advise as a must-have?

RSL: If you have a family, dependents, liabilities or want to leave a legacy you should be looking at life insurance, as well as ‘living benefits’ which include critical illness cover and income protection.

This means you or your family will directly benefit from a lump sum or regular income to ensure you can maintain your standard of living.

Wills and powers of attorney are also important; while they are not specific protection policies they can be instrumental in ensuring upon your death that your assets are directed and your wishes are carried out as intended.

sally.hickey@ft.com