ProtectionMay 5 2022

How to reduce the cost of premiums

Supported by
Scottish Widows
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Supported by
Scottish Widows
How to reduce the cost of premiums
Photo by Lukas via Pexels

People over the age of 40 have already lived though a high inflation, high interest rate environment.

They may also have lived through the strikes in the 1970s, seen mass unemployment, rolling blackouts, queues for bread and can talk with personal knowledge about how expensive goods and services are today by comparison.

But there comes additional pain points for all adults today: the price of residential properties has risen exponentially since the 1990s; energy prices are shooting sky high; CPI is pushing an expected peak of 7 per cent to 8 per cent a year; and the tax-take in people's pay packets has come into play this April.

According to latest data from the Office for National Statistics, all these have combined to create what the ONS economists have described as a "struggle", stating: "Those adults who see a rise in their cost of living may struggle financially as a result."

The figures for March speak for themselves:

  • 87 per cent of adults reported an increase in their cost of living over the previous month in March 2022. This was 25 percentage points higher than in November 2021.
  • 23 per cent reported it was very difficult or difficult to pay their usual household bills in the past month, compared with a year ago.
  • 43 per cent reported that it was very or somewhat difficult to afford their energy bills in March 2022.
  • Of adults currently paying off a mortgage and/or loan, or rent, or shared ownership, 30 per cent reported it was very or somewhat difficult to afford housing costs, and 3 per cent claimed to be behind on rent or mortgage payments.
  • 17 per cent reported borrowing more money or using more credit than they did a year ago.
  • 43 per cent reported that they would not be able to save money in the next 12 months.

A recent study by LV's Wealth and Wellbeing Monitor revealed that an approximate 22mn people expect their finances to worsen over the next three months.

But, as LV points out, like many other providers, including Scottish Widows, Aviva and others took measures during the pandemic to help people remain covered, including offering payment holidays, putting a temporary freeze on premiums and aiming to be competitive.

Analysis from the Bank of England's staff blog, Bank Underground, in 2021 suggested there was a fair degree of competition in the life market in the UK, despite consolidation in the life insurance market, which benefits consumers.

Nevertheless, as people seek ways to reduce household expenditure, from switching supermarkets and service providers to cancelling subscriptions, there is a risk that insurance premiums might be in for the chop.

Insurance industry commentators at the December 2021 Protection Review conference did warn that lapse rates could rise in 2022 unless there was direct and timely intervention to help customers stay covered.

Overcoming temptation

Amanda Kerr, head of protection for Scottish Widows, says: "Many customers are unaware of how flexible protection policies can be.

"Most providers offer the ability to reduce the sum assured, and amend the term, which could be particularly helpful for mortgage holders who change their terms or pay a large, single contribution to their mortgage."

Advisers agree the flexibility exists. Setul Mehta, head of business development and adviser services at the Openwork Partnership, says there are ways to help clients overcome the temptation to surrender their income protection policies: "The starting place should be to have sufficient IP cover in place to suit a client's needs.

One strategy I use is to check the amount that is owed on the mortgage.Alan Lakey

"But if that is not possible, then move a step towards their 'overall needs'."

This means it might be worth reducing the level of cover for IP, which in turn would reduce the amount of monthly premiums.

Mehta explains: "Does the client need to have the maximum amount of cover right now? What other income or savings could they have that means their IP plan could be used to top-up whatever else they have?"

Getting the level of benefit right, to match the need, is crucial but can be a big influence on the annual cost to a client (see the box-out example below).

Kevin Paterson, managing director at Enduralife, concurs: "If affordability is likely to be an issue it might be worth either reducing the cover and premium accordingly to make it affordable in the short-term, but at the same time, consider cheaper alternatives – as long as there are no medical underwriting issues."

He suggests, for example, using decreasing term for level term, or family income benefit in place of term assurance when it comes to writing life insurance policies.

It could also be worth deferring the start of the payout. For example, if an employer offers three months of sick pay, and the client has enough savings to cover an additional three months comfortably, it might be worth opting for a policy that has a six-month deferred period.

From personal experience, the cost of my own income protection was reduced noticeably thanks to my current employer having a generous 12-month sick pay scheme as part of the overall health and wellness benefits (which includes private medical insurance). 

Consider all aspects

It is important, therefore, for advisers to consider all aspects of a client's financial and employment benefit situation.

This also includes looking at the mortgage, according to Alan Lakey, founder of CI expert and adviser at Highclere Financial Services. 

He says: "One strategy I use is to check the amount that is owed on the mortgage and compare this with the insured sum currently shown on a mortgage protection plan.

"Many existing plans have interest rates between 8 per cent to 15 per cent, which means the insured sum has fallen more slowly than the mortgage. This offers an opportunity to reduce the sum to make a saving on the premium."

Alan Richardson, protection specialist at LifeSearch, says it is also useful for advisers to reassess add-ons that might increase the premium, similar to how a client might reduce the cost of pet insurance by removing certain elements such as boarding stays.

He comments: "In some cases, added options can be removed, or cover can be reduced from comprehensive to basic." For example, if a provider offers doctor services that are costed into the price of the policy, this could be exchanged for the provider's own member advice line if one is offered.

Staying in regular contact with your clients is key.Kevin Paterson

When it comes to critical illness cover, sometimes the more comprehensive, the more expensive. Therefore it is worth advisers considering products that offer 'core conditions' such as heart disease, stroke and cancer, which can help lower the cost of premiums compared with the full CIC. 

There is also a way of rewarding good behaviour, so to speak. For example, most policies come with exclusions or conditions around people who have smoked or are using nicotine substitutes to reduce dependency, as this FTAdviser highlighted earlier this year.

But it is also worth reviewing a client's policy after any exclusion period should the client become completely nicotine-free. Kerr explains: "The post-sale alteration that can have the largest effect on premiums is amending smoker status.

"If a client, originally set up on smoker rates, has not smoked or used nicotine replacement products for 12 months, then the insurer may be able to amend the customer's status, which usually results in a significant premium reduction."

Communication

It is clear being unable to work through illness or injury could have a devastating effect on households, as they will continue to be squeezed financially by the effects of inflation. This is why, according to Mike Farrell, protection sales director at LV, "with living costs increasing, it is more important than ever for people to have protection cover in place".

He says: "Advisers can help by having regular contact with their clients to understand and review their protection requirements."

Farrell notes that if customers are considering changes to their protection cover, LV recommends they speak with their financial adviser, who can "offer alternative options and speak to providers on their behalf".

Paterson states: "Staying in regular contact with your clients is key to getting ahead of any potential problems your clients may encounter, in particular demonstrating an understanding of the challenges they may be facing."

The post-sale alteration that can have the largest effect on premiums is amending smoker status.Amanda Kerr

Richardson agrees: "Reviewing cover with an adviser when your budget is stretched is sensible, as advisers can help clients to tailor cover to match their needs and their budget.

"It may be tempting to consider cancelling insurance at a time like this, without realising it might be possible instead to reduce cover or term to save money."

But it is not only communication between adviser and client that comes into play here: communication between adviser and provider is also beneficial.

According to Richardson: "Some insurers have really understood the difficulties people are facing, especially with customers who are vulnerable, and they are prepared to consider payment holidays case-by-case."

Farrell explains: "Payment breaks can offer relief without clients sacrificing their cover. These are offered a month at a time, for up to three months, with no requirement for premiums to be made."

Key take-aways

Before the client asks to reduce or to surrender a policy, intervention throughout the year is advisable. This could include the occasional client newsletter or social media links to articles discussing the importance of protection at a difficult economic time.

Things to remember:

  • Reduce the payout amount; reduce the cost.
  • Lengthen the deferred period.
  • Consider short-term IP plans for some clients.
  • Look at alternatives to full CIC – perhaps consider core conditions plans instead.
  • Assess all areas of a client's finances, including employer benefits, investments and the mortgage.
  • Explore whether there is a change to smoker status.
  • Keep in regular contact with clients and providers.

On this last point, Paterson adds: "Making sure your clients continue to understand the need for protection is also important, but it may be worth carrying out a review to reinforce the need for the protection, and ensure the level of cover and premiums are appropriate and affordable."

simoney.kyriakou@ft.com