The current crisis has highlighted the importance of having an adequate protection plan in place that will provide individuals and their families with a robust financial safety net and allow them to feel financially secure in all circumstances.
Figures released by the Association of British Insurers show that in 2019 more than £5.7bn in protection claims was paid out, accounting for 98.3 per cent of all claims made. That equates to £15.8m paid out each and every day.
In response to pressure for adequate protection measures to be put in place, the government announced the new life assurance scheme, which promised £60,000 would be made payable to the families of NHS and social care workers who lost their lives to Covid-19 while working on the frontline.
While there is no denying that this is a significant sum of money – indeed, £60,000 is reported to amount to twice the average pay of NHS staff – for many families, it still is unlikely to provide enough of a financial safety net.
This is especially the case for families who were financially dependent (full or in part) on a deceased loved one.
Key Points
- More people are seeking protection at the moment
- What is ‘enough’ cover is subjective
- Many think they are covered by their company
Of course, what constitutes ‘enough’ is highly subjective. However, the reality that many people are falling short of receiving adequate financial support during these unforeseen and challenging circumstances should encourage all of us to review our current protection plans and check that we have enough cover in place to ensure our longer-term financial wellbeing.
There is evidence to suggest that more financial advisers are engaging with their clients on protection. LifeQuote reported a 29 per cent increase in protection applications in January 2020 when coronavirus was first talked about in the UK.
Anecdotal evidence indicates that many financial planners have been supporting their clients with financial planning housekeeping, including trusts; however, the witnessing formalities for wills are still a challenge in a self-isolated environment.
The role of the adviser
Past surveys carried out (most notably by Swiss Re) to measure the existence and size of the protection gap in the UK have ascertained that the gap is real and material.
The reality that many people are falling short of receiving adequate financial support during these unforeseen and challenging circumstances should encourage all of us to review our current protection plans.Swiss Re’s 2020 Term & Health Watch showed a strong rise in protection policies over the past decade (see table), but if this were to be compared with the entire working-age population of the UK, the gap between those with income protection and those with none becomes all-too clear.
It seems that one of the main reasons for the gap in personal protection is that individuals believe they are already covered by their company’s scheme and therefore do not require any further protection.
Many of us will not even know how much cover is provided, let alone look to challenge whether the level of cover amounts to enough.
Now more than ever, financial advisers have a responsibility to be talking to clients about their protection plans – in relation to both individual and business protection – and should be encouraging them to challenge the level of protection they have in place. To do this, advisers must ask the challenging, but important questions: ‘Do you have cover? How much? Is it enough?’
How much is ‘enough’?
For engaged advisers, judging if a client’s cover is enough is based on having a thorough knowledge of the client, their family and their responsibilities, as well as an understanding of what delivery that ‘ideal’ will take, expressed as a capital sum, in order to meet their lifestyle.
Anecdotal evidence indicates that many financial planners have been supporting their clients with financial planning housekeeping, including trusts; however, the witnessing formalities for wills are still a challenge in a self-isolated environment.Every client is different, so tailored advice is crucial to adding value. Furthermore, the adviser should know how much capital it will take to generate a particular level of income.
Currently, the expected yields from investments are set to be a little lower than they might have been only a few months ago.
If we expect a 2.5 per cent yield it will take £1.2m to generate £30,000 a year – and that is pre-tax. Now that will not factor in any overt provision for income to increase over time – though it might, of course, if yields increase.
It also must be said that this ‘model’ also rests on a desire to maintain (at least the nominal value of) the capital that generates the income, and, for some, that may be excessive.
This measure is subjective, and it will be down to the adviser to calculate what is ‘enough’ for their client, which may lead to a lower amount of capital being needed to generate the regular payment required.
Note ‘payment’, not income. The amount required may be generated at least in part by drawing down on capital – sequencing risk (reverse pound cost averaging) permitting.
A tax planning strategy may lend weight to this and it goes without saying that if you can deliver tax alpha, the amount you need to draw from your capital could well be less.
Having clarity over what the client’s aspirations are in relation to capital drawdown/preservation will also be hugely important.
The increasing use of cash flow planning tools has helped many clients visualise their situation, better assess the risks and appreciate the consequence of taking or not taking appropriate and relevant action.
It seems that one of the main reasons for the gap in personal protection is that individuals believe they are already covered by their company’s scheme and therefore do not require any further protection.The linkage with their goals becomes a powerful planning scenario, bringing our clients closer to their financial plan and an appreciation of the value of advice.
Goals-based planning has become increasingly popular, with many advisers seeking to build closer and deeper relationships with their clients. This has not, however, resulted in a significant reduction in the protection gap, despite the reality that the loss of a spouse or main income can significantly impact on achieving the aspired goal.
Protection was the cornerstone of the advice profession, and one of the lasting legacies of the current pandemic should be the refocus on protection needs in financial planning.
Plugging the protection gap
Now more than ever, advisers should be having professional, balanced, sensitive and client-centred conversations about their clients’ individual and business protection plans, founded on carefully constructed audits.
Asking clients to look at their own circumstances through protection health checks is an effective way of assessing their understanding, stimulating a discussion and enabling them to assess the risks.
Beyond the current crisis, there is still no doubt of the absolute responsibility that financial advisers have in challenging clients about the level of the protection they have in place, if the industry is to expose and help plug the protection gap.
By engaging clients in a protection conversation, not only could the profession make an impact on the protection gap, but we may also see our clients’ financial plans becoming more robust and help them achieve their long-term goals.
Edward Grant is a chartered financial planner at St James’s Place
